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I have been prominent in two separate stories in the media this past week regarding default properties and their effect on the market and the borrower. This past Sunday I was in the New York Times, and on Tuesday I was in a nice piece on AOL Daily Finance.

The Times piece centered on strategic defaults, where borrowers who could otherwise afford a mortgage stop paying on purpose. Many people who do this do so for cash flow reasons; if you paid $350,000 for a house in the peak and the same house is for sale at foreclosure down the street for $180,000, some people just buy the cheaper one and let the old house go, cutting their payment. However, the credit consequences can be dire. The debate on the ethics of the practice is heated.

The AOL Daily Finance article is part of a series on how the housing crisis has affected different places. Mount Vernon, a city in Southern Westchester County which has been rife with short sales and foreclosures, was discussed in the article. Values are down in the neighborhood I am quoted on about 50%. What is not mentioned is that many of the foreclosures were actually renovated by the prior owner before they ran into financial problems, which punctuates the crisis, for me, in a very sad way. You hate to witness broken dreams.

Which is why we work so hard on getting our short sales closed and done for our clients. Preventing foreclosures is what we are all about.

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After two similar discussions the past week, it would be wise to address how a short sale should be priced. After all, if the offer submitted to the lender is subject to approval and therefore not a certainty, all the more that the asking price is also a hypothesis.

It is. But, as educated guesses go, a good short sale broker’s list price is pretty educated. It takes into account comparable sales, competing listings, and, sometimes, the gut sense of a seasoned professional. You have to skate a nuanced line in some cases between what will get the phone to ring and what the lender will sign off on.

I have blogged before on the stress that a short sale can put on a home seller. They are typically in default, getting collection calls and letters from the bank, facing the steps up to a foreclosure, and often overwhelmed with distress. When one is under stress, it is natural to instinctively move to eliminate the source of the stress, so often sellers want to lower the price to get moving, and dramatically so. The problem is that if you lower the price to be the lowest asking price the neighborhood has seen in 5 years, you can foster too much skepticism from the lender and  the offers you get might not be enough for the bank accept.

For example, if comparable sales put your homes estimated value at $400,000, it is irresponsible to whack the price to $320,000 just to get an offer and be done with it. You have to balance between what the buying public will respond to and what the lender will accept. And few homes sell in 10 or 20 days. It takes some time. Not all short sales tale a long time to find a buyer,  but some can, and too many reductions too soon can sabotage your efforts.

The best (and really only) approach is to price the home aggressively based on comparable sales, and then review and reduce every 30 days unless market activity indicates something faster. But it is market activity, and not nerves or stress, that should source the price strategy.

Contrary to what some may think, an owner is not obligated to submit every offer to the lender for approval in order to do a short sale. As a matter of fact, there are offers that an owner should never submit to the lender. That is the owner’s right, as they still hold title and ownership of the property, and the bank’s decision in a short payoff is simply the amount they’ll take to release the lien and settle the debt.

In Westchester and the surrounding areas of New York, offers are not submitted to the lender for approval, contracts of sale are. And those contracts are between buyer and seller, not the bank. The contracts are conditioned upon bank approval, but they are binding contracts none the less. And it can take every bit of 3-6 months for the lender to render a decision, all while the foreclosure wheel turns. If the owner goes to contract with an offer that is less than a realistic expectation of value, they can be six months closer to foreclosure when the bank issues their denial of the short sale.

Sellers are therefore looking for realistic offers, not for their own pockets, but to ensure the bank accepts the short payoff. If an offer can be judged favorably by 3 recent (i.e., 6 months or less) closed and 3 active comparables, the offer bodes well. Buyers who submit speculatively low offers, unsupported by 3 sold and 3 active,  are doing something ill advised; if their amount is not close to what comparable sales for similar properties are getting on the market, they could waste months waiting for the inevitable “no.” And that “no” could cost the owners their house.

We have a enough offers in multiple bid situations meeting resistance to the banks; lowball offers invite peril to the seller and frustration to the buyer. And it is ultimately the sellers decision as to whom they’ll go to contract with. A short sale sellers surrenders proceeds. But no owner surrenders their rights. While the bank makes the final decision on amount, it is the owner, on advice and market data from their agent, who determine what to submit to the bank for that decision.

The top emailed story on the New York Times website today, Short Sales Resisted as Foreclosures Are Revived, is over 2 days old. That it remains pinned as the top story to share is significant, especially to anyone in New York who is facing foreclosure or in a short sale. Bank of America has, after an absurdly short period of time, ended its moratorium on foreclosures and deemed that its house is in order to resume foreclosures. Aside from the field day that thousands of attorneys will have in the coming years with this, my thoughts are a mixture of dislike for the decision and sadness for borrowers who are in default with Bank of America.

The resistence to short sales is particularly unfortunate. The suspension was hoped to be a catalyst for making short sales a more viable option, but banks have yet to devote sufficient resources to streamline the process. The rationale is a fear of fraud, but fraud only accounts for a minuscule percentage of short sales- like 1 or 2 percent. The other 98 or 99% ought not to suffer because of it. The resumption of foreclosures removes any chances of positive change, unless the government steps in, which the Obama administration seems unwilling to do.

There is a silver lining to the story: The New York Times is finally getting interested in examining why banks resist short sales when they are so much of a better option for all involved. The Times is also starting to follow the money- banks do have some financial incentives, such as accounting practices which you or I could not do to write off a loss, which makes foreclosures more attractive.

Make no bones about it: in the absence of a government with a spine, banks will look at short term gain and little else. Changing their architecture to accommodate short sales is an expense and a learning curve, and they will resort to dumb rationalizations and red tape hell to keep the foreclosure train rolling.

This makes a savvy short sale specialist more of a necessity than ever. We are still batting .900, closing  more than 90% of the short sales we list, and I think it is due in no small part to understanding who, and what, we are dealing with. Choose your agent wisely.

This article in today’s NY Times makes reference to banks being reticent to approve short sale because of a fear of fraud. This is not the first I have heard the concern, and while any fraud is wrong, the argument is a straw man excuse to not streamline the process. Are there fraudulent short sales, where a family member buys and rents back, or an investor is flipping the house at a below market purchase? Yes. Should that ruin it for the 99% of the rest of the people? No, of course it shouldn’t. It is like being against health insurance because there are hypochondriacs out there.

A very small percentage of short sales are fraudulent.

Per the Times:

Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.

So 98% of the people should suffer? You’ll probably see the similar percentages on shoplifting. Should we close the malls?

It is just another excuse to not do the right thing.

$300 million is a drop in the bucket compared to the massive amount of wealth that has been plundered by the banks’ own fraud and deception. I’ll say it again: In the New York area, and Westchester county, where I am based, the property values are enormous and the dollars at stake for the regular borrowers facing foreclosure are enormous. They need to be treated right and presumed innocent.

Recently, a listing brokerage instructed one of my agents to include a HUD-1 as part of our client’s offer on that brokerage’s short sale listing. To say that it was a peculiar request is an understatement; The HUD-1, which is a mandatory form in any transaction involving a mortgage financing, itemizes and documents all expenses for both buyer and seller. In New York, especially Westchester and the Metropolitan area, it is prepared by the seller’s attorney in a short sale, with approval from the bank approving the short sale, the  buyer’s attorney, their bank attorney, and the title company. Aside from the real estate commission line item, there is no involvement of the real estate agent.

While the request was for a “preliminary” HUD-1 and not the final form, the instruction for us to provide one was ill advised and questionable to my thinking. A I said, the form includes the seller’s expenses as well. How can the buyer’s agent possibly know the seller’s mortgage amount, mortgage payoff, back taxes, back payments, or other liens and expenses? The answer is that they can’t, unless the seller provides it. Why the seller would provide such information to the other side in a transaction is beyond me. They have their own fiduciary in their listing agent and attorney.

Maybe they had a great, innovative point; if so, I didn’t glean it from their Kramdenesque stutter when I inquired. We had an offer. They needed to present it and crunch the numbers on behalf of their client.

Upon occassion, I am contacted by “short sale investors” who promise my full commission, will buy my listing for cash, and re-list the house with me after they close. Tantalizing, huh? Oh, just one little thing: They want to negotiate the short sale themselves. In other words, they want to be an authorized third party designated by my seller client to deal with my seller’s bank.

No deal. You know who deals with my seller’s lender? Myself and the seller’s attorney as their fiduciary advocates. The bank won’t even talk to us for reasons of confidentiality without a signature authorization from the client. For a seller to authorize the purchaser to negotiate on their behalf with the bank for the short sale is antithetical to any agency rule on a listed home I have ever known.

As I said, it is the seller’s broker and lawyer who negotiate a short sale in New York. There are some outside companies who are paid by the seller to do so for a fee, but I do not hire them. I refer my short sale clients to an attorney who can do short sales in their sleep.

The point here is that everyone needs to play their position in a short sale transaction, and that our fiduciary responsibilities and duties to be an advocate don’t go out the window when a short sale is involved.

Who negotiates for the seller? It should be the people the sellers hire, preferably their agent and attorney, not the people they sell to.

Originally posted on my Westchester Real Estate Blog.

Weak Leadership

Being a businessman I seldom delve into politics in this platform, but it is clear to me that part of the problem in affecting a sustainable recovery is a lack of political will in our current leadership, including the White House, after reading this gem in the Times on the foreclosure fraud crisis:

the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

So we’ll just spook the borrowers, who are already hammered and traumatized. Protect the banks. Look, I am a brazen capitalist and this is insanity. Insanity! And both parties are culpable.

In our local elections, state Senator Suzi Oppenheimer has been devoting the bulk of her campaign to going negative on challenger Bob Cohen, accusing him of being a slumlord, among other things. Cohen, who apparently owns  a number of buildings in the Bronx, is having tenant complaints and other dirty laundry aired by Ms. Oppenheimer in her bid for re election. This skirts the real issues. Cohen, a real estate guy, for all his blemishes might actually have more insight into our problems than the Senator, who has been in Albany since 1985. This is not an endorsement. It is conjecture. But neither candidate is addressing the issues facing the electorate while we discuss the man’s apartment buildings.

Late last night, in a post entitled Short Sales are the Answer, I said the following:

It is a shame that there is no political will on either side of the isle to hold lenders feet to the fire to affect meaningful change, and defaulted homeowners must contend with a mad race to work a miracle with an uncaring, unresponsive monolithic entity before that monster forecloses, repossesses their home, wrecks their credit and crushes their dreams. This is not progress.

In reading this morning’s NY Times on the White Houses sheepishness (Hey Mr, Obama, can you pretend that Bank of America is General Motors?) and reflecting on Ms. Oppenheimer’s electioneering in lieu of addressing her constituents’ pain, my words are all too sadly true. Forget Washington for a moment. This is Westchester County’s state senate seat. This is our representative in Albany.

Show me someone up for election with the guts to stand up to lender’s unwillingness to change their architecture against short sales, which are a huge part of the solution, and G.O.P., Democrat or Martian, they’ll have my vote.