Question from today's short sale class

Realtor: “Jillayne I have nine short sales going on right now and,”

Jillayne: “Wait a sec, did you say NINE short sales?”

Realtor: “Yes, and here’s my question. One of my clients refinanced her Redmond home and took 89,000 cash out. Then she bought another home in another state with that cash. Now she wants to do a short sale on her home here in Redmond. It looks like she’s going to be short about 100,000. The lender on the Redmond home can’t go after her new home out of state, right?”

Jillayne: “Short sales are for homeowners in financial distress with no assets. The lender being shorted will ask your client to sign a new note/deed of trust in the amount of the shortfall and this new deed of trust will be recorded against your client’s new home.”

Realtor: “Yes, but their home is out of state. The shorted lender can’t do that, can they?”

Jillayne: “Yes, the lender can do that.”

Realtor: “But the home is in another state.”

Jillayne: “Your client is going to have to prove that they do not have any other assets. Just because a piece of real property is not located in Washington state doesn’t mean it’s not an asset. Washington state is not that special.”

Readers, why should lenders just randomly “forgive” the shortfall for all homeowners wishing to sell short? Especially homeowners who took cash-out equity loans to buy other real property. Surely there are some hard luck, true financial distress situations going on nationwide, but this is not one of them.

Besides, I thought homes in Redmond were holding their value.

Reminder: Homeowners selling short and/or in foreclosure should always obtain legal counsel. Google your state bar association to get started.

85 thoughts on “Question from today's short sale class

  1. You’re not serious, are you? They really thought that since the asset was in another state that it didn’t matter? And this person was a Realtor? Very, very scary…

    But as the client in a short sale, I have to tell you that the Realtors that I’ve been talking to mostly don’t seem to have as much knowledge as I do after just doing a little online blog reading. It would be like if I could pilot a jet after just doing a couple of Google searches.

    Am I hitting a string of unusual people, or is this the norm in Re-Ville?

  2. Hi Dick,

    Real estate has a high turnover ratio and agents (well, actually all of us in real estate, mortgage lending, title, and escrow) are constantly in learning mode.

    Topics like short sales and foreclosures are not typically taught in real estate school. This is the other side of the industry. The “dark side” if you will. New to newer agents, meaning agents who have entered the industry during the past 9 years or less may not have ever worked in a down market.

    Keep looking. There are many, many experienced, competent agents out there. I recommend interviewing at least 3 agents that know your market area and that also have successfully closed no less than 5 short sales.

    Agents reading this blog: If you’re seeking to be hired for a short sale listing and you have no experience, consider co-listing the property with another experienced agent.

  3. Jillayne,

    Many times the cash out refi had an inflated appraisal. We would need to know how long the person owned that home to know if gaining $89,000 was remotely feasible for that period of ownership. We would also need to know whether or not they had cashed in their equity any other times from the time they bought it until they pulled that cash out for their next purcase “out of state”.

    Also, I have seen a small shortage turn into a big one via missed payments and penalties and legal fees. So getting back that $89,000 by selling it for $89,000 more is not enough to prevent it from being short after costs, which grow by the day if the payments aren’t made.

  4. How long ago the loan was taken would clearly be a factor the lender would look at. And their asking where the money went doesn’t seem like a question they’d be unlikely to ask.

    Interstate collections is actually an intersting area of the law. It is sometimes possible that due to differences in state law (usually community property laws) they can collect in another state when they couldn’t collect here, or collect here where they couldn’t collect in another state. But even if they can’t collect, I don’t see them being likely to agree to a short sale in this situation.

  5. Why even try the short sale? The person should just walk from the Redmond house. They got the cash already, their credit won’t matter since they have the new house/mortgage already, what have they got to lose? This is going on all over the country, people in Arizona are buying the house next door with HELOCs which are selling for 40% less now and walking away from their current house. Its a disturbing trend, but its the fault of the lenders not those taking advantage of their stupidity.

  6. Jillayne,

    You are partly right. Homes in Redmond are holding their value better than other areas. This is not to say the market isn’t tougher than last year, it just means the Redmond/Microsoft area is stronger than most.

  7. Kary,

    I have an offer floating on a short sale that is a big mess with a granite countertop 🙂 Not sure how it ever appraised so high for the cash out refi, but the person who did that fully intended to make major improvements and got partway finished when they got cancer. A lot of the money went to medical bills, though that was clearly not the intention at the time it was borrowed. Shit happens.

    Now the house is in worse condition than before the loan was made as everything was ripped out and only a portion of the new stuff made it into the house. Now it’s just a big mess with a jacuzzi tub and a granite countertop that you can barely see under the sawdust. You can hardly walk through the place it’s just a mess.

    I said “Oh my God! Is that a brand new granite counter top under there?” Otherwise it looked like a teardown.

  8. Jillayne,

    I closed a short sale in a great neighborhood near Microsoft recently. Same scenario as above. Someone went in and ripped stuff out and stopped the flip project before it got past taking stuff out. There were even tools left behind. Just walked away with the money and decided it wasn’t worth finishing the job.

    When the house is half apart and sells for less, it’s not always about appreciation and depreciation. The asset was diminished by people, not market conditions.

  9. Hey b,

    I’ve been reading about this as well but I can’t get behind the idea. ALL of us will pay the consequences, not just the banks. However, I do see your point in the case of this particular transaction. To me it seems like they already made their decision when they tapped their equity for the sole purpose of buying out of state. At this point, why bother? Who wants to pay back the shortfall when the worst thing that could happen is a foreclosure on your record?

    If the homeowner committed fraud somewhere along the line, what are the chances of discovery? Probably low.

    Consequences: HIGH interest rates for all of us, coming soon to all mortgage lenders near you.

  10. Hi Readers,

    Kary, are interstate collection issues trumped by collections on a federally-related loan?

    Kary brings up a great reminder for us. All homeowners who are trying to put together a short sale and also homeowners facing foreclosure should always hire an attorney and obtain legal counsel.

  11. Jillayne,

    I’ve seen it go both ways. If the person was down and out it was forgiven. If they werent down and out and had other means of paying eventually, they were not forgiven. I’ve done about as many for sellers I have for buyers, but not all were here in Seattle over the years. When I represent the buyer I am sometimes told that the seller is signing a note and not forgiven, but I don’t actually see that happen as the agent for the buyer.

    I wonder if from a long term creditworthiness standpoint if those who sign and pay the notes eventually, even if it takes years, are worse off than those forgiven. The forgiven ones may put it behind them in a few years, where the ones paying a bad debt for 20 years may carry the bad debt on their credit longer.

    Anyone know if the one who pays may be penalized for a longer term in that situation?

  12. Jillayne –

    I agree with you on that, I was kind of playing devils advocate in what is happening these days. I think we are going to end up paying for it all anyway, short sale or foreclosure. There is not a good way out and the politicians only know how to spend to save us all. My hope is that more foreclosures like that right now will kill off the worst of the lenders when the mess is finally settled.

    On another point, something tells me that they are probably planning on doing this anyway, investigating the short sale lets them at least tell their friends “they tried”.

  13. Hi Ardell,

    Escrow closers are a good source in terms of trying to find out what’s going on at the street level. Closers are telling me that homeowners ARE signing a new, unsecured note at closing to begin paying back the difference.

    I expect that we will see more “debt forgiveness” scenarios rise as the economy continues its descent.

  14. I wonder if her 9 short sales are all to friends, or in the same condo project, or just what … she clearly isn’t a ‘short sale’ expert, so the 9 somehow got to her, by osmosis? Woo-hoo! An expert is born. Sigh.

    As to our economy … what happened to the voices of reason, and voices of experience? Agents, bankers, financial people, economists? I mean, really. It’s like a bunch of 30-year olds got put in control of every facet of our economy, and due to lack of experience, and “prices never fall-stocks always go up-banks never fail” etc etc just kept ramping things up. Where did previous wisdom go? Did the invention and common use of computers eat experience up?? :-).

    I’m more than half serious here.

    Did everyone experienced just retire in the last 7 or 8 years or what??

  15. What if she goes through foreclosure instead of a short sale? Are mortgages on primary residences nonrecourse in Washington? What about refinanced mortgages on primary residences?

  16. b wrote: “Why even try the short sale? The person should just walk from the Redmond house. They got the cash already, their credit won’t matter since they have the new house/mortgage already, what have they got to lose?”

    The new debt was presumably on a second. It can be hard to walk away from seconds. They could elect to just sue you instead of foreclosing (and that’s probably true in California in this situation since it wasn’t a purchase money loan).

  17. Jillayne wrote: “Kary, are interstate collection issues trumped by collections on a federally-related loan?”

    Not that I’m aware of. Federal bankruptcy law can put some interesting twists on things, but other than possible criminal issues that can result from loans with federal banks, I’m not aware of any federal twists.

  18. Alan, I think I answered your question responding to “b,” but in Washington the lender can almost always elect to go after the homeowner instead of non-judicially foreclosing. And they can elect to judicially foreclose, and collect a deficiency (although there are downsides to that, especially on homestead property). From your questions I assume you’re from California.

    Ardell, I’ve seen situations like what you describe with the partial remodel. Things like that seem to happen no matter what the economy, because the precipitating event is not related to the economy.

  19. Off subject but not really
    I have a loan with Bear Stearns a distressed lender. Bear is in the process of selling of their assets for cents on the dollar. I would like to purchase my loan or their asset for two to five times what they are likely to get. I did purchase two privet party notes at steep discounts in the late 80’s and just went to escrow to do the deal. Does Bear wave any lawful obligation to respond to respond to and offer from the borrower in this state? I want to at the very least to try and buy this note. Is any one here able to help or steer me in the right direction?

    Property located in Longview, Washington
    3/2 2124 sq ft blt 1993
    6/4/06 Loan; Alt-A No Doc No Job
    LTV; 65% $175,000
    Fix 30 years
    PI; 6.75%

    If I don’t ask I can’t get!

  20. Bobr’s suggestion might be the next big innovation. We’ve officially come full circle from mortgage securitization to desecuritization. “Hey you don’t want my mortgage or think it’s worth anything? Fine! I’ll take it then!”

    I also want to thank you for the visual of Bear Stearns waving at its lawful obligations. I can picture it now: “Goodbye lawful obligations, it was nice knowing you!”

  21. Yo, lax-

    It’s not really that innovating if you think about it. When the pendulum swings too far the other way there are opportunities to make this bet profitable. Many hedge funds are already setting up to do the same thing. A lot of these are run my ex-heads of major mortgage units like Merrill, Countrywide, JP, et al. Hopefully, this will swing the market back to more rational levels. Now, if only I had enough money to buy some of this stuff myself….

  22. I know it’s hard to detect sarcasm in the written form, but my earlier post was not meant seriously.

    The chances that Bear Stearns would allow a mortgagor to buy back his (conceivably performing) individual note back at a discount are close to nil. Even if they wanted to, the income stream probably flows through half a dozen mortgage backed securities.

  23. Lax-

    What I was talking about was non-performing assets, not performing assets. Although, conceivably Bear may still want to dump them even if they are performing because they can’t fund them. Same situation that happened to CIT. They got downgraded, couldn’t issue CP and is considering selling the assets. Now, the borrower trying to buy back his own note, that’s another angle I haven’t investigated.

  24. Kary, I am not from CA.

    The problem is that BSC’s loans will be sold at auction. If anyone figures out that you are willing to pay X% for your mortgage, the others will realize that mortgage is worth at the very least X% (since you have the money to purchase it at that discount) and will be willing to pay (X+Y)% where Y is some positive marginal value.

    Maybe BSC should contact each of their borrowers and ask them to bid on their own loan to get a baseline valuation on their assets.

  25. This is not a joke. I am willing and able to fund now. I will pay 8% commission if some one can put it together at $85,000 or less gross to me. This loan does have some value to me. Last year I was able to gain 14% off the funds. This loan being rapped up into some bond pool and not able to sell to me is bull…If I were to pay off in full there would be no problem getting it out of the pool. Any one want to try and help?

  26. In the world as I have known it some one loss has always been some one else gain. Now with the taking of Bear Stearns by the FED and giving it away backed by our tax dollars and not allowing the market to set price is wrong. I am steeping up to the plate and want to pay more then what the are giving it away for. Can you steer me to the right real estate people that will help me shoot in an offer?

  27. Bobr,

    Write your congresspeople and suggest legislation that requires lenders selling these loans at auction to give the property owner the chance to bid on the loan. I think this is one possible solution to the ‘foreclosure’ problem.

  28. Hi Bob, Alan, and readers,

    Hold on: Let’s not move so fast.

    I believe the world of loan securitization to be more complex than just being able to bid on and buy back one’s own mortgage.

    You might make your payment to Bear but Bear might hold only a part of the loan. Bear might be collecting your payment and then turning around and paying that out to many different investors.

    If all of us were easily able to just bid on and “buy” our own mortgage loans back for a prices far less than what it says on the note, then loan securitization the way we have known it for decades will come to an end. (Heck, it will forever change over the next several years anyways but that’s beside the point at hand.)

    I don’t forsee Bobr scenarios happening because most homeowners don’t have the excess cash lying around to “buy” their mortgage. So that means they would need to get a new mortgage loan in order to buy the old loan out of the pool.

    What’s being described could also be called a “Short Refi” where we ask the mortgage holder to reduce the principal balance, yet we’re still willing to make monthly payments.

    In the case of Bobr, I imagine a scenario where each investor with a stake in Bobr’s mortgage would have to approve the sale. I envision a paperwork nightmare trying to scale this idea with a large number of homeowners.

    I’d love to look at a cost benefit analysis chart on this.

    I believe it makes no difference what the home is worth, what we’re playing with is the amount of the debt and the contracts between the party that collects the monthly mortgage payment and the party that receives monthly payouts on their investment in each of our individual mortgages.

    Those contracts are not readily available for you and I to see.

    Why would I, an investor, make a deal to sell the mortgage loan back to Bobr at a substantial discount, if Bobr is ready, willing and able to pay his loan as agreed each month? This mortgage loan still has value!

    The reduced value is in the loans that are already in default or have a history of default and loan modifications: High risk now equates to less value.

    Your thoughts?

  29. The agencies that have been rating all of these mortgage securities apparently have no idea how to estimate risk (based on recent empirical evidence). By giving the mortgagees a chance to bid on their own mortgage they can get a better idea of the chance of the owner walking away. The issuing bank could even ‘finance’ the purchase themselves and hold the new mortgage.

    This is simply a market mechanism to enact principle reduction. Why should only the big players with the right connects benefit from principle reduction?

  30. Alan
    I will do that, yet now is the time to act on my own loan. Just have a need to strike wile the iron is hot. I want my offer to come out of an office independent of acting for myself. If all the investment banks are short of funds I would think there are some sharp business folks right here right now to help me solve there problem in a little way and help keep the tax payer out of the middle of this. If we can do one loan then how many more?,win

  31. Except Jillayne has a point- you need massive underwriting staff and the transaction costs would be significant.

    I like the idea, however.

  32. If you were to buy this note it would be yielding you about 15 7/8%. Bear is in process of selling it at a yield of what 500 to 1000%? I not out for blood. If I don’t ask I can’t get. I want help making them an offer?

    Thank You

    I am sorry for taking this off topic

  33. I do not understand the need for massive underwriting staff and the transaction costs should not be as significant as to the loss they are already taking. I want to try! You can’t do this you can’t do that… lets try to do what they say can’t be done.

  34. Bobr,

    No need to apologize for hijacking the post. Your question is interesting.

    What comes to mind right away is the need to hire a competent attorney with specialized knowledge in mortgage backed securities laws.

    What also comes to mind is to be wary of anyone who holds himself or herself out as being able to accomplish this for you for one, easy, low price and then asks for a downpayment of a couple grand.

    I’m also trying to visualize how that phone call would go with Bear Stearn’s loan servicing department.

  35. I agree with Jillayne that this is not an issue for a real estate agent and we all wish you luck with your effort and hope you will report back to us.

    The issue of “the pool” is like buying a grab bag. They sell a whole bundle of things, usually bad debt, at say $.30 on the dollar. Some will pay off entirely, some will be worthless and if the buyer of the bundle ends up with $.50 on the dollar after collection costs, they are happy.

    If the lender hand picked out the best of the lot and sold them for $.60 on the dollar, no one would pay $.30 on the dollar for what was left in the bundle.

    There have to be some good ones with the bad ones for anyone to buy the whole bundle.

    But best of luck to you pulling yours out of the bag.

  36. Bobr signed a mortgage note with the lender. That mortgage note was packaged up with thousands of others and valued by an investor. Just because that bundle of notes is worth less now than before doesn’t give Bobr any reason to expect those investors to sell him back his individual note at a discount.

    Y’all have been really nice with Bobr, but I don’t think suggesting hiring a securities lawyer would be productive. If Bobr is having trouble making payments he should see a HUD approved foreclosure counselor or contact his lender.

  37. Bobr-

    Nice try buddy, but what you propose does not make economic sense for anybody except maybe you in the short term.

    First off, the Fed’s move is about preserving the financial system not about abusing our tax dollars. Even though you may think they don’t have your interest at heart, they actually do. A Bear bankruptcy could have been a total disaster of epic proportion for everyone here and abroad. At that point I doubt you’d care if you could profit by buying your loan back at a discount. You’d be more worried about withdrawing money from your account at the bank. Also, if you think about it, the Fed is betting that these assets will perform and when the market does rationalize they may still be ahead.

    Second, Jillayne and Ardell already pointed out some key points. Banks aren’t in the business of structuring loans if they are performing. When they sell loans at at discount they sell a pool of assets underlying the security/bond. They cannot cherry pick the good ones and sell the bad stuff. There would be zero investors for these pools if this was allowed. I also believe that would be against securitization law, but I’ll try to find the exact language when I get back to the office on Monday.

    So, you could default on your loan and try to convince bankrupcty court that somehow you couldn’t make payments, but still have money for an investment. You might even think that you’re helping the economy by bidding on your own “distressed asset” and the FED is corrupt, but as honest as you maybe, I still sense greed in your reasoning. Please consider the broken families that are actually losing their homes before you consider profiting by mispricing in this crazy, irrational market.

  38. When looking at just one note, they’re going to look at the property value first, and then the financial condition of the payor second. And to take a discount, they’re going to want a sale to a non-related third party, so there’s no issue of lost future appreciation.

    Cherry-picking in non-sale situations would just reduce their overall percentage of recovery.

  39. So what you are saying is the banks are insolent. The repeal of Glass-Steagal act 1998 by the Dem’s might part of the problem. By making an offer with cash puts a floor under that loan.

  40. Bobr-

    Unless you are in default, there’s no way you can buy your loan at a discount. Perhaps you can come up with some scheme to default then buy your loan, but expect some jail time in the future.

    Why don’t you just try buying defaulted loans of other borrowers at a discount, renegotiate the payment, service, then cure them yourself, turn around and sell it later for a nice 15-20% profit? There’s already a market starting for that. It will have the same affect of a floor like you’ve suggested.

    If you say banks are insolent because they’re in business to make a profit then I agree with you.

  41. Q-Diddy
    Loans or notes are personal property and are bought and sold every day some at a premium others at a discount.
    As best I can understand the bond market froze last July because the investors are unable to place a value on loans such as the one I have (NO DOC). I just placed a bid, now it has some value. In the past it would have required a 1 to 1 1/2% above a conforming note rates and would have been held in portfolio by the lender for seasoning and then sold or held. Risk of that note going bad was bore by the original lender for seasoning.

    The bankers put together a pool of notes holding A,B,C and D paper. Then had them insured at which point the rating agencies gave this pool of notes a AAA rating. This in turn allowed the bankers to sell at a premium. There market for AAA paper, money market accounts, retirement accounts, insurance companies and the like is enormous and made hundreds of billions dollars. The bankers created such a demand for there product, they being short on inventory, were able to sell the no money down paper as fast or faster that the sales people could put it together.

    We Americans are good at what we do and the real estate egents sold, the loan reps sold, title companies sold, insurance companies sold a product that the bankers wanted to package and resale at a premium.

    Now that the products that the bankers sold are going bad the FED has step in to save an investment bank which has not been done sense the 1930’s. In order for this to happen things are allot worse then we know. All assets across the board are falling in value at present. As it stands right now the only winners are the bankers and the ones without any skin in the game. Our Equity is going a way as profit fore bankers.

    Bear Stearns building alone is valued at 1.2 billion dollars and it and all its assets are being sold at 345 million or so. I think they or we as tax payers can do much better. Hence my offer is more than fare!

  42. Bobr,

    There’s an important piece that you might not be aware of, that may help all of us understand that what you’re seeking to do is way more complicated than just buying your note from a pool.

    When mortgage loans are securitized, they are cut up into many pieces. When you pay your mortgage to Bear, Bear may be making interest payments to upwards of 10, 40, 50 or more different entities.

    Trying to buy one’s own mortgage out of that pool means those 10 to 50+ entities have to “approve” of your ONE sale.

    The problem here is that YOU are the buyer and you want to make an offer of LESS THAN what is owed.

    Why would those 50+ entities sell you your own mortgage for less than what is owed if you’ve been paying as agreed this entire time? It’s like you’re trying to tell them that you are planning on defaulting. None of these entities would agree to that.

    So now let’s try this again. Let’s say you ARE defaulting on your loan and you want to buy it back out of the MBS pool (mortgage-backed securities).

    If… can buy it back, then that means you have the cash needed to, 1) keep paying the loan; and/or, 2) qualify for a new loan.

    The investors wouldn’t release it to you if you can qualify to repay the original contract amount. So back to square one, you’re asking for a short refi. A bank would likely not approve a reduction in principal unless you are able to PROVE that you are in financial distress. Please refer to my original blog article titled “Short Sales” linkd at the beginning of this article.

    We are seeing politicians float ideas around about principal reduction. However, this blogger will never be in favor of a bank bailout that rewards lenders…the biggest speculators of all.

    Bobr, if your idea were to go through (it won’t but I don’t blame you for asking) that would mean that all of us could just bid on and buy our mortgages out of RMBS pools for pennies on the dollar, even if we have the ability to repay our mortgage at current terms.

    WHY would ANY lender, bankrupt or not, agree to this? Answer is, they won’t.

    Bobr, your mortgage may be pooled together with other non-performing loans. Since no one at Bear thus far is willing to sit down and open up every single loan file and see what’s inside, the entire pool is marked down.

    One way to attempt a profit here is to invest your money in the company that purchases Bear’s pools of RMBS. But then you’d have to believe most of the loans will perform. NOBODY KNOWS the answer regarding ALL the loans in those pools. That’s why they’re marked down: Fear of the unknown.

  43. I think all the principal reduction schemes have shared appreciation on the other side.

    That’s the problem I have with what Bobr is trying to do. Absent a sale, there’s no way a bank is going to agree to a short sale. That would be nuts because then they’d just be agreeing to reduce their debt any time property values declined, to the lowest point of the decline.

    Years ago I represented a bankruptcy estate that had a debt owing that only paid about 5% when interest rates were more like 17%. We had other funds available, and asked if they’d take a discount given the interest rate. Their response was no–we don’t discount for paying early. In the end on that piece of property it was a good decision for them because the loan was eventually paid off.

  44. Two things on the Bobr thread:

    1) Jillayne said: “WHY would ANY lender, bankrupt or not, agree to this? Answer is, they won’t.”

    I, in my limited experience of 18 years, have once seen it happen and it couldn’t have happened to a nicer family. Generally the bank will sell the house for much less than what is owed, but not back to the person who currently owns it and especially not if the person who owns it is not in default on their mortgage, that’s true. But I did see it happen once, so never say never.

    Twice I have had “short sales” of property where the owner was not in arrears on his mortgage in any way. In both of those situations the home was used as collateral, in a package of collateral, to secure a business loan. In one of those cases the lender not only pulled the home out of the collateral package, but sold the property back to the current owner (though maybe in his sister’s name) for $140,000 when the property was worth $200,000 or more. Not only that, but the real estate taxing authorities also reduced the taxes to that of a $140,000 home temporarily until they got back on their feet. It was actually an Act of God for sure, but let’s give the lender the credit 🙂

    2) A bank owes to its shareholders the duty to do everything possible to collect the amount in full. While the net effect may be better on that one note if they sold it to Bobr for more than they would sell it in the bundle, they would be breaching their duty to their shareholders in the process. The bank must do their best in all things, and to sell a note for $.70 on the dollar that could be collected at dollar for dollar, would be a breach of their obligations.

    Selling it for $.40 cents on the dollar to someone who will in addition buy the worthless one for $.40 cents on the dollar is a responsible thing to do. Each act must in its own right be the responsible thing for them to do, or they will be breaching their duty to their shareholders via the single incident that resulted in less than they could get.

  45. Haha,

    I whish I was on drugs. I have always paid my bills on time. (credit-score 824) I never over extended myself no big screen TV here. The first new car I was 48 and paid cash. I have all ways saved. Now those who over extended them selves are reaping the benefit of reduced mortgages, I and others like myself get to eat our equity. I guess I had it wrong, should have got a no money down 125% and new big screen and furnishing to boot. No the ones on drugs and the bankers got it wired!!

  46. Bobr-

    You’re digging yourself a deeper hole. Why are you trying to reneg on an agreement you’ve signed? Say the situation was reversed and you were the bank. Would you want your customer to reduce the amount after you’ve given them the loan? Where do you think the banks get the money to give you a loan? It isn’t free you know. Also, if you have so much money sitting around, why don’t you just pay down the loan principal and reduce your interest expense? That option should be available to you and you don’t need any of our help for that.

    When you purchased your home you agreed to the purchase price and the terms of the loan. The Banks borrowed money and agreed to lend to you at a spread or profit. Both sides have taken risk, but now you want to reduce your exposure for free? I understand if you were under financial stress and needed a loan mod, but that’s an entirely different situation then the one you’ve suggested.

    Lastly, I know there’s been a lot of news surrounding the Fed, Bear, Lehman, Goldman, et al, but please do a little more research instead of reading the news. I know for many people the info they have is what they read, but you have to be careful when you formulate your opinions on what you read and not what you know. That’s just my advice to you.

  47. Bobr-

    I sense you’re being cynical, but I’ll indulge.

    The negative numbers are a result of the TAF (Treasury Auction Facility) exceeding total deposit reserves. Put it differently, the Fed is conducting Reverse Repo (cash for collateral) with banks to fund their less liquid assets.

    What’s your point?

  48. Bobr and readers,

    I asked Tanta. Here is her response, with her permission to copy and paste:

    “I have encountered this idea before. The problem is a profound one of information assymetry, which is why it would never work. Bear is (presumably) selling this loan at a deep discount because Bear does not know–and the proposed buyer of the loan does not know–whether it will continue to perform or not. It’s hard for anyone to know that about loans–in the aggregate–these days. A great deal of the discount in the price is there because of uncertainty.

    The borrower is the one who knows how the loan will perform, if anyone does.

    To make a discounted bid on your own loan is to confirm that you are likely to default. If you knew that you would never default–at least, if you had no intention of defaulting and you had the capacity to repay–you would in effect be “affirming” that the principal value of your loan is par. To say your own loan is worth less than par is to say you are not going to pay back all of your principal. There isn’t anything else it could mean.

    To offer to buy your own loan at a discount is like offering to bet against your own performance in a sporting event. Everyone would expect you to “throw” the game, and so would not allow you to wager.

    The only choice you have is to offer settlement for less: you could always ask Bear to accept a short payoff, on the grounds that it might be less than the note due but more than an outside bid. But you can’t buy your own loan by competing with people who do not have the information or the motives you do.



  49. Q-Diddy

    This last month the FDIC announced they were hiring at 180k per year 200 more people, and bring out retirement some folks that help shut down the S&L’s back in the 80’s. They expect to shutter a number of banks this year.
    The H3 is what the name implies reserves of banks.

    I guess me point is the pies need to be recast ASAP whether I am able to buy my note or not. I have never felt so unsafe financially in my life. I am thinking that if the bank actually received some offers they might get the idea that that paper is worth far more in pool A paper B paper and so on.

    Here is another link.
    The Federal Reserve Boar San Francisco Educational Recourse

  50. Tanta

    If I were to buy a house and the seller were to finance the first TD I would want first right of refusal if they were to sell that note at a discount because a sum of cash became more valuable to them than an income stream.

  51. Bobr-

    Just because you’re willing to step in to offer a higher value for your loan what makes you think others will do the same? Do you think every homeowner would offer more if they had the same option? I think we’ve beaten this horse to death already, so if you still can’t figure it out by now perhaps you may want to take this offline and email one of us.

    On your stuff about the FDIC and FED:

    Have you thought about why these loans can’t fetch the same value they used to? The market is already skittish as it is, recasting the pies will only push the investors further away and quite possibly shut down the market for RMBS paper forever.

    What we’re experiencing is really a paradigm shift. The rules that used to apply to mortgages are changing as we speak. The new world will include more regulation/oversight, less reliance on rating agencies, bigger haircuts/enhancement/insurance, diversified liquidity sources, reduced investor demand and higher interest rates.

    The best thing you can do to help is actually quite simple – just continue to make timely payments on your mortgage.

  52. Bobr,

    The note and deed of trust that you’re paying are now held by more than just one person. It’s a false analogy.

    Go ahead and give it a try. Call Bear Stearns and start the process. Check back with us in a couple of weeks and let us all know how it’s going.



  53. haha-

    Short of ridiculing him, I’d say we’ve been pretty critical. I wouldn’t want to discourage Bobr and others to post their concerns, in fact, I encourage it. This is a fascinating time in our history and a great opportunity for all to learn.

  54. “Short sales are for homeowners in financial distress with no assets. The lender being shorted will ask your client to sign a new note/deed of trust in the amount of the shortfall and this new deed of trust will be recorded against your client’s new home.

  55. The stage has been set for a systemic collapse.

    A few months ago when CFC was trading around $14, I posted that it is on its way to bankruptcy.

    Now, we should see a painful systemic collapse in the financial sector with housing taking most of the toll. What we have seen so far is 10% of what is coming.

    NAR keeps predicting that the housing market is rebounding for the last year or so. LOL !!
    The Fed is fighting a liquidity crisis.

    It is a question of solvency … and not liquidity.

    Good luck

  56. Stockoperater-

    “The Fed is fighting a liquidity crisis”

    “it is a question of solvency….and not liquidity”

    What do you mean by these 2 statements?

  57. Pingback: RealEstateUndressed » Blog Archive » March 2008 Magnificent 7 Nominees

  58. Hi Jillayne,

    I was trying to do a short sale in Florida. The markets bad, and I only have one interested buyer. The note is 340,000. I put nothing down because it was a construction loan. The short sale is for $180,000. I can’t continue to keep the home because I lost my money due to stockbroker fraud. The bank did agreed to a short sale with the conditions that I come up with $35,000 at closing. If I give the bank $35,000, it would be difficult to pay all the IRS taxes and strain me financially.
    I have kept current on all my mortgage and taxes to date. Should I except the banks terms or walk away and foreclose? I tried writing the bank explaining my situation but the bank saw money in my saving account that they want. The money is used for my primary home and expensive.
    Would the short sale ruin my credit as much as a foreclosure? My present credit score is 750. I spoke with a real estate Attorney in Florida who stated, I should walk away, foreclose and file bankruptcy. I feel I will be out more money on attorney fees and destroy my credit. I’m all ears. I need some advice so I can make a good decision based on facts. What would my best option be to preserve my credit in this situation? Can I negotiate with the bank not to report the loss to the credit bureau, or do all short sale get reported to credit bureau and the IRS?

    Thank you,


  59. Hi Clint,

    If you have the $35 the bank will want you to contribute this.

    Short sales are reserved for people with ZERO assets.

    If it is true that you have been a victim of any kind of fraud, you will need to provide the bank with proof of the fraud from a neutral dis-interested, third party. Just you saying “I’ve been a victim of fraud” is not going to work.

    Why don’t you try re-approaching the bank with the offer to come in with a lower dollar amount, less the amount you owe for IRS taxes. You will need to provide proof of the IRS tax bill.

    a short sale is far less damaging to your credit when compared with a foreclosure and bankruptcy.

    It sounds like you are motivated to do the short sale. Find another attorney in your area who can help you present this to the lender again with these new facts.

  60. Pingback: Options for Homeowners Facing Foreclosure | Rain City Guide

  61. Hello Jillayne,

    Although I am very busy, I will comment on some of your topics!

    I have read your blog and I find numerous inaccuracies as it pertains to short sales.

    These are the things people should consider:

    1) Phantom Income on Non-owner occupied properties. Do you owe the IRS? If you had a non-owner occupied home, you may. Even an owner occupied property might have exposure based on length of ownership, loan amounts etc.

    2) Next you need to ask do I owe the lender/investor for deficiencies?

    Owner occupied and non-owner occupied property deficiencies? Deficiencies on amounts unpaid after the short sale? Yes lender/investors can and will seek deficiencies as they related to losses, especially on non-owner properties. Even in non-judicial foreclosure cases they may sell their unpaid deficiencies to a collection agency or private party for collection at some later date. Unless you get a full lien release you are on the hook!

    3) Lender/Investors WILL do short sales even if you have other assets! I personally do 25+ successful short sales per month and they are not looking to make you liquidate your 401k’s etc. Lenders simply want to see that you do not have the income or cash in the bank. Even cash in the bank does not equal automatic denial for a short sale.

    4) Short sales are easier with certain Lenders? True, this changes daily and sometimes, hourly.

    5) Short sales have a better chance with attorneys? Ok, I may get flak for this.. False, a successful short sale negotiator needs to know in detail the subject matter and have keen negotiation skills, regardless of their having passed the Bar!

    I will answer any question but not provide legal advice!


    Randall Lowell

  62. Hi Randall,

    1) As I say over and over and over again, homeowners in financial distress should not rely on a real estate agent, mortgage broker, investor, or non-profit agency (it appears as though you are all four of these which seems to be a conflict of interest to me) for any kind of tax advice at all. Especially not me, a real estate educator. Tax questions need to be directed towards the homeowner’s favorite tax advisor.

    2) Homeowners in a short sale scenario need to have an attorney review ALL their paperwork prior to signing anything. This post was written just less than a year ago, prior to Washington State’s new Distressed Property Law. Today, Realtors and real estate agents are way more mindful of making sure their clients have legal counsel to explain all the possible consequences of a short sale, including WA State Supreme Court opinions that addres possible debt that survives the trustee sale OR short sale.

    3) We are in agreement here. However, if the homeowner has lots of other assets, and that homeowner is also seeking debt forgiveness, these two don’t automatically go hand in hand.

    4) N/A

    5) The reason why homeowners in financial distress need an attorney and not a short sale negotiator is because attorneys are held to a higher standard of care towards their clients than a “short sale negotiator” whatever they are. As far as I know, anyone can call themselves a short sale negotiator with no education or licensing.

    The second reason why homeowners in financial distress need an attorney and not a short sale negotiator is because the attorney can EXPLAIN all the legal documents, and explain a homeowners rights and responsibilities and advise a homeowner of all the possible consequences.

    A short sale negotiator is poorly qualified to assist a homeowner in anything other than, perhaps the negotiation portion.

    If the seller has chosen a real estate agent with poor negotiation skills or an agent who is unskilled at short sales, then the seller could chose to pay a third party negotiator to do the job that the Realtor cannot.

    Thanks for stopping by RCG.

  63. Thank you for your prompt response.

    Ok, we can agree to disagree. I am certain that there are real estate agents and mortgage brokers far more knowledgeable in these matters than most attorneys. I realize legal advice is reserved for an attorney but the standard to which one must adhere is in question. If a non-attorney practices law without a license they face severe consequences, whereas an attorney that fails to provide correct or accurate advice usually gets paid and does not face suffer any consequences.

    I find it very interesting of late that very few attorneys have the knowledge base to provide information yet, it seems as though passing the Bar was their ticket to becoming an expert in every arena.

    Perhaps an IRS opinion as it pertains to an individual’s short sale tax implications would be the one most significant, long term deciding factor to consider before entering into a short sale agreement. Secondly, is there a deficiency? So a CPA or Tax Attorney or a combination of both would be the proper 1st step. Another concern is attorneys and unscrupulous negotiators charging fees up front for advice or promised results. Even paying an attorney for advice may have been the wrong decision when it comes to feeding their families!

  64. “whereas an attorney that fails to provide correct or accurate advice usually gets paid and does not face suffer any consequences.”

    Not so. Consumers can file complaints with their state Bar Association.

    “I find it very interesting of late that very few attorneys have the knowledge base to provide information yet, it seems as though passing the Bar was their ticket to becoming an expert in every arena.”

    The other reason why attorneys are better than unlicensed, unregulated short sale negotiators is because attorneys REFER clients to other attorneys who ARE specialists when they are unable to help a client.

    “Even paying an attorney for advice may have been the wrong decision when it comes to feeding their families!”

    I fail to see how this would be true. If a homeowner is unable to afford legal counsel, they can seek help from the free legal aid services offered by most all state Bar Associations or in this state, they can also contact the Northwest Justice Project for help with free legal aid as well. Homeowners can also seek out help from HUD-approved counseling agencies for free help with short sale negotiation.

    All in all, I do not see many reasons why a homeowner should pay a third party short sale negotiator with one exception:

    If the listing agent was so incompetent as to not know how to negotiate the short sale. At this point, as a homeowner, I would make sure that the third party negotiator’s fee came from the listing agent’s commission.

  65. Ok, I see that there are areas I must either have more experience in or that you have not actually had the dubious task of seeing where a HUD counselor will actually be of assistance.

    Try calling HUD, ask for a counselor and see what the level of service actually is! Have you ever filed a complaint with the BAR association.

    Ok, so in the real world I have rarely seen an attorney pass up business. I realize the higher end Attorneys may indeed refer to another but most will take business where they can.

    Free legal aid is predicated on funding availability and again the expertise of those attorneys. I will agree with you that seeking advice is imperative to sound decision making.

    Please call 211, HUD, Neighborworks (the ruler of the CRA…community reinvestment act…monies) and the other “free” service providers. I think you will find that you “got what you paid for” in most cases!

  66. Hi Randy, Yes, I do have experience filing a complaint with the Bar Association. It was a pain-free experience. Yes, I do have experience working with HUD approved housing counseling agencies and their employees.

    There are MANY options for homeowners seeking help. The FREE options simply MUST be made available to the general public as OPTIONS. Some will choose to go the “free” route. Others will choose to hire an attorney, others will choose to hire a competent real estate agent.

    I have had attorneys talk me OUT of spending money with them. What they do, is they lay out all the possible consequences of, for example, going to trial v. settling out of court. An attorney knows that he/she is in a higher position of knowledge (about the law) than the average random consumer. Because of this, the duties owed to the consumer are higher than, say, an independent third party short sale negotiator which is what you sell.

    So I am clearly on the side of homeowners exploring all costs of third party help.

    I have found that hiring an attorney (WHO HAS HIGHER DUTIES TO THE CONSUMER) is often LESS EXPENSIVE than hiring a third party negotiator, plus the consumer has the advantage of receiving legal counsel.

    Here is how the choices stack up from my perspective:

    Do it yourself: Free
    HUD Counselor: Free
    Free legal aid (for those who qualify): Free
    Hire a Realtor: Commission owed but negotiation can be done BY the Realtor for the same cost as the commission
    Hiring an attorney: Less expensive than you’d think.

    Hiring a third party negotiator: Sometimes MORE than legal counsel without the higher duties, and the the homeowner still has to pay Realtor commission on top of this fee. A poor choice, in my opinion.

    Hands down, I believe homeowners are far better off hiring a competent Realtor to negotiate with the lender as well as hiring legal counsel in order to understand all the short sale paperwork, and all their legal options.

    The ONLY time a third party negotiator is worth their fee is if it is coming out of the Realtor’s commission.

    Consumers hire Realtors for their negotiating skills and for the knowledge and experience. With this lacking, surely a third party negotiator can pick up the slack…..for a fee….but this still does not negate the consumer’s need for competent legal counsel to understand all the possible consequences of a short sale.

  67. Well said. I still disagree with your assertion that your experience with “HUD” approved counselors had a positive, reproducible outcome. I agree that Real Estate Brokers and Mortgage Brokers have a significant place in loan modifications and workouts. DFI actually recommends that only Mortgage Brokers and Attorneys should be permitted to work on loan mods.

    Realtor is a designation for a fee and while they are supposed to adhere to a “higher” standard it does not address competency!

    I can agree that legal guidance is important but again I feel as though tax consequences and exposure should be addressed before any loan mod or short sale is considered.

  68. Seems to me this Redmond homeowner thinks this is some sort of easy Real Estate get rich quick scheme …you are right an asset is an asset is an asset. goegraphical location changes nothing, Looking at the real Estate business today obviously the situation is somewhat upside down from what it was three or four years ago but the basic principles of borrowing and lending are still the same and I am sure the sharpies are out there looking to milk the unwary in this confused time, all the more reason for home owners and agents to employ the best professional counsel available.

  69. An Asset is an asset no matter what. I’ve been hearing more and more about people trying to take advantage of short sales when in fact they are there to help people in trouble. Part of the reason they’re so frustrating is the lender taking along time to verify everything including looking for fraud.

  70. Ok, I have an update for the group.

    I have been in Utah for nearly a year now and have adapted my focus to helping Lenders mitigate risk for their senior and junior lien portfolios and helping consumers file suits against those who don’t play nice. To this endeavor I have branched into consumer protection issues at the finite level. Loan modifications and short sales are both time consuming and take patience beyond reason. However, we do get them done. One of our “accelerated” methods for Lender and Servicers delaying the process includes hitting them with a big stick. In this case our understanding of contract law, statutes, acts, rules and a litany of other “tricks” usually gets the job done. Skeptical? Well our litigation efforts have resulted in “collectable” judgments in excess of 20 million dollars to date. The goal is to focus on how to change the system by changing the players. In other words we are taking so much of their money that they simply cave in to our demands. A word of caution, to simply state a violation such as TILA or RESPA is not adequate to get an attorney past summary judgment and causes Judges to become frustrated. At present, I have teams of interns, externs and wonderful people helping to facilitate our goal of 1 billion dollars in collectable, covered, judgments. It should come as no surprise that it is getting worse which makes my job even better. With the lack of oversight, the SAFE Act debacle (it does not even address Banks or Credit Unions), the demise of nearly 80% of the Mortgage Brokerages and the recasting/resetting highbred ARMS we are having a field day against Banks, Servicers and the “Others”. Short sales work for some, the tax implications may not! Knowing a competent Real Estate Agent, and yes Jill an attorney or two, may help you as a Real Estate professional avoid a huge E & O claim.

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