Bank’s attitude toward struggling loanowners toughening as prices rise

In any negotiation the options of the parties determines the strength of their bargaining position. Ordinarily, when a lender and a borrower execute a promissory note and a mortgage agreement, the lender has most of the power, which is why they determine the terms of the agreement. The only option a borrower has is to shop for slightly better terms from another lender. If the borrower fails to pay according to the terms of the promissory note, the lender has the option of calling a public auction on the property to regain the outstanding balance on the loan. Lenders wisely force the borrower to put money down on the transaction to provide a cushion to protect the lender from loss if the foreclosure sale doesn’t obtain appraised value on the property. At least that’s how the system is supposed to work.

When house prices crashed, borrowers found they had more options and lenders found they had less. The balance of power in the negotiation shifted. Because lenders foolishly loaned money at 100% of appraised value during the bubble, they had no cushion when prices fell. If they were to exercise their contractual right under the mortgage agreement to call a public auction, they stood to lose money – lots of it. This made banks hesitant to foreclose.

Once lenders stopped foreclosing on delinquent borrowers, word quickly spread about the bank’s weakness, and many borrowers strategically defaulted to obtain free housing or negotiate a better deal than what was in their original promissory note. With millions of borrowers in default and prices well below the face value of their loans, banks were in real trouble. Borrowers suddenly had options they were not accustomed to and banks suddenly did not. As a result, banks started cutting deals. Loan modifications and short sales became the norm as lenders hoped to kick the can until prices reflated to peak values where the normal balance of power is restored and they have option to foreclose and regain their original loan capital.

When the banks fully committed themselves to can-kicking and eliminated most, if not all, barriers to loan modifications, they were able to get enough people paying something on their mortgages to give the illusion of improving delinquency rates, and more importantly, loan modifications took away the need for banks to foreclose and resell the property. As a result, MLS inventory dried up, and prices bottomed out.

Now that we appear to be past the bottom, Loanowners are in no hurry to list and sell their houses, and the balance of power is shifting back in the banks favor. I wrote that the loan modification entitlement will be rescinded as prices near the peak. This will happen because once banks have the ability to foreclose and get their money back, they have little or no incentive to continue to cut loanowners a special deal. It makes more sense for them to foreclose, get their money back, and loan it to someone who will pay in accordance with the terms of their promissory note.

Evidence of this shift in power is starting to show in anecdotes and in the mainstream media. For example, this is from a recent comment:

Soylent Green Is People says:

A passing quip this week from a staff member at BofA was telling: When borrowers come to the mothership asking to perform a Short Sale due to hardship, the loss mitigation staff looks at the loanowners capital base and current sales prices, then pushes back an “either / or” option – either you sell at market and make up the difference from your own funds, or we foreclose. The staff member says about 60% of all SS requests are pushed back in that manner. It’s the way it should have been done from the start frankly and high time a hardline was taken.

The days of selling short are likely coming to an end IMHO.

Banks weren’t doing this two years ago. They were so desperate for payments that they made almost any deal they could. Now that prices are rising, they have more power, and they’re using it.

Don’t be fooled by the following headline. The real story is the changing balance of power. Rather than cutting deals, banks are telling the committed squatters it’s time for them to leave.

Report: Short Sales Replacing Mods as New Norm

05/28/2013 By: Esther Cho

Among the available foreclosure prevention tools, short sales are becoming the weapon of choice for servicers while the use of loan modifications has slowed, data from Fitch Ratings revealed.

For example, among bank servicers, the percentage of resolutions in the loan modification category decreased to 26 percent in the last half of 2012 from 57 percent in the first half of 2010, according to Fitch’s latest quarterly index.

However, for nonbank servicers, loan modifications are ranged between 69 to 71 percent during the same time period.

Meanwhile, short sales showed significant increases over the last couple of years. In 2012, short sales represented 51 percent of resolutions for bank servicers, up from a low of 20 percent in 2010. For nonbank servicers, short sales grew to 16 percent in 2012, up from 11 percent in 2010.

“Loan modifications have fallen due partly to overall declines in mortgage delinquencies,” explained Diane Pendley, managing director at Fitch. “However, they may also have fallen out of favor since many modified loans have already failed and do not qualify for another modification.”

In instances where modifications are not possible, the rating agency explained servicers will look to a short sale, which allows servicers to save by avoiding the cost of dealing with a foreclosure. …

With falling prices, lenders would rather kick the can and wait for better days. With rising prices, when faced with a repeat defaulter, banks have finally had enough and they are politely asking them to leave. If the delinquent borrower does not respond by either making payments or arranging for a short sale, they get added to the foreclosure queue.

Short Sales Losing Favor with Lenders?

Daily Real Estate News | Thursday, May 30, 2013

Lenders may be less inclined to approve short sales due to rising home prices, according to a new report by RealtyTrac.

During the first quarter, short sales posted a 35 percent drop compared to year-ago levels.

“The decrease in short sales was a bit of surprise given that 11 million home owners nationwide still owe more on their homes than they’re worth,” says Daren Blomquist, spokesman for RealtyTrac. “Rising home prices are taking away the incentive for short sales on the part of both home owners and lenders.”

Negative equity is keeping homes off the market. Both lenders and loanowners benefit from an equity sale, so both parties are holding out for one. The low housing inventory is an indicator of residual mortgage distress.

Foreclosure prices are on the rise, increasing 28 percent in the first quarter. The banks may be realizing they won’t necessarily lose a lot more money by letting a home go into foreclosure instead, Blomquist says.

However, foreclosure sales have been plummeting too, reaching their lowest levels since early 2008. Foreclosure sales made up 21 percent of the total market during the first quarter, which is down from 25 percent one year ago, according to RealtyTrac.

Foreclosure sales peaked in early 2009, when they made up 45 percent of all homes sold nationally.

Still, foreclosures are making up the biggest bulk of sales in certain states, such as Georgia (where 35 percent of sales were foreclosures in the first quarter), Illinois (32 percent), and California (30 percent), according to RealtyTrac.

Foreclosure is still the final solution for many distressed loans. We still have an enormous backlog of what used to be called Shadow Inventory. Millions of borrowers still aren’t paying their mortgages, and millions more are paying on loan modifications with little or no chance of sustaining ownership. Some of these will survive long enough to do an equity sale, but in many markets where prices are still well below the peak, many borrowers will not endure that long. First, the banks will foreclose on the committed squatters that have been living payment-free for several years, then they will start to push out the newly-above-water by ratcheting up their cost of ownership when their loan modifications expire. If they refuse to pay, they will be a foreclosure too.

Many borrowers have become accustomed to the accommodating policies of banks in recent years. Most don’t realize these policies were born out of necessity, and when conditions change back in the bank’s favor, the attitude of bankers will be much less accommodating.

Another day, another Ponzi

I suppose one good thing that comes from the can-kicking by the banks is that they keep a steady stream of HELOC abusers and Ponzis for me to cover. If the crash had been allowed to proceed unimpeded by government and lender manipulation, these people would have been pushed out years ago. As it stands, we are still seeing those who extracted hundreds of thousands and squatted for years moving through the system.

  • The former owner of today’s featured REO paid $330,000 back on 10/20/2000. He borrowed $205,000 and put $125,000 down.
  • On 3/21/2001 he opened a $92,000 HELOC.
  • On 5/13/2003 he obtained a $429,000 HELOC.
  • On 6/3/2004 he refinanced with a $663,000 first mortgage.
  • On 9/14/2004 he got a $36,841 stand-along second.

After obtaining nearly $500,000 in mortgage equity withdrawal, he was finished in 2004. He probably missed getting more at the peak. He quit paying in late 2011, and he was finally forced out in April of 2013.

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17235 ORANGEWOOD Ln Yorba Linda, CA 92886

$599,900    ……..    Asking Price
$330,000    ……….    Purchase Price
10/20/2000    ……….    Purchase Date

$269,900    ……….    Gross Gain (Loss)
($47,992)    …………    Commissions and Costs at 8%
$221,908    ……….    Net Gain (Loss)
81.8%    ……….    Gross Percent Change
67.2%    ……….    Net Percent Change
4.7%    …………    Annual Appreciation

Cost of Home Ownership
$599,900    ……..    Asking Price
$119,980    …………    20% Down Conventional
3.90%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$479,920    ……..    Mortgage
$114,833    ……….    Income Requirement

$2,264    …………    Monthly Mortgage Payment
$520    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$125    …………    Homeowners Insurance at 0.25%
$0    …………    Private Mortgage Insurance
$58    …………    Homeowners Association Fees
$2,967    ……….    Monthly Cash Outlays

($400)    ……….    Tax Savings
($704)    ……….    Principal Amortization
$160    …………..    Opportunity Cost of Down Payment
$95    …………..    Maintenance and Replacement Reserves
$2,118    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
$7,499    …………    Furnishing and Move-In Costs at 1% + $1,500
$7,499    …………    Closing Costs at 1% + $1,500
$4,799    …………    Interest Points at 1%
$119,980    …………    Down Payment
$139,777    ……….    Total Cash Costs
$32,400    ……….    Emergency Cash Reserves
$172,177    ……….    Total Savings Needed
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