It’s All About the Banks
October 3, 2008 by Christe Roknich
So much has changed…and so quickly. Remember when banks were in the business of receiving deposits from savers and issuing loans to borrowers? It appears as though banks are engaged in an entirely different line of work these days.
Our banks have become home owners! As you know, our local Orange County real estate market is driven by bank foreclosures. But did you know that the other major factor driving down real estate prices right now is real estate “short sales?”
So what on earth is a short sale? A short sale, or “short payoff”, is a negotiated settlement between lender and borrower that allows a property to sell without the normal requirement for the mortgage loan(s) to be paid in full. If you are having trouble making your mortgage payments, a short sale may be a viable alternative to foreclosure.
Here’s a practical example: a buyer purchases a home somewhere in Orange County back in late 2005 for $1 million. The buyer also takes advantage of the lenient and generous loan terms available, and borrows $950,000 with only a $50,000 downpayment. Let’s now assume that the price of the home has corrected 25%, and that the home is now worth $750,000. But in order to sell this home, the owner must now contribute more than $200,000 in cash to bridge the difference between what the home is worth and what is owed to the bank.
Such a large out-of-pocket expense is not so easy a task for most people, especially in a slowing business environment. And unfortunately, many homeowners who can afford to pay off their loan choose not to do so, and let their properties go to foreclosure. That’s where the negotiated short payoff fits into the picture. Rather than foreclosure, the property is sold through conventional means subject to the lender accepting less than the full amount owed. Why would a lender cooperate? Based upon current market values, upon genuine hardship of the borrower, and the inevitability of foreclosure, the bank will often cooperate with a borrower and accept a short payoff. By doing so, the bank avoids becoming a home owner. We have always asserted that banks lose more money when they foreclose and resell a home, than when they accept a reasonable short sale. The seller avoids a foreclosure, the neighborhood avoids yet another “fire sale”, and perhaps, the market rebounds faster without so many bank foreclosures.
We have a great deal of experience with negotiation of short sales, dating back to the Orange County real estate market correction of the early ‘90’s. Call us, or contact us via email, for a confidential consultation to determine if a short sale is the best strategy for your individual situation.
It’s a Financial Roller Coaster
September 19, 2008 by Christe Roknich
Wall Street is looking and behaving a lot like Knotts Berry Farm lately. Our financial markets have been on a real roller coaster ride this year, but the intensity of the ride increased dramatically this past week.
Earlier in the year, the investment firm, Bear Stearns, was “bailed out” through actions of the Federal Reserve Bank and the U.S. Treasury Department. More recently, and with direct impact upon our real estate market, the Federal Government took control of both Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are (were) what is (was) known as GSE’s, or governement sponsored entities. In other words, these GSE’s behaved like private corporations (badly), but were implicitly backed up by the strength and credit of our Federal Government. So the new owners of Fannie and Freddie are, you guessed it, you and us!
This week brought even more turmoil, and finally, some “resolution” as well, when the Treasury Secretary announced the planned formation of a government entity to purchase and process bad loans, similar to the Resolution Trust Corporation that was formed after the savings & loan debacle in the 1980′s. How does all of this relatively bad news all affect your home’s value?
Inventory of homes for sale on the market is high, but what’s worse, the inventory is dominated by bank-owned foreclosures and properties subject to lender short-payoff (more on “short pays” in a later column). Despite the argument that Uncle Sam (all of us, again) should not be in the business of buying bad debts from dumb lenders, the efficient disposition of these loans and properties should help to lessen their impact on our residential resale market in Orange County. The sooner we get back to a “normal” market of buyers and sellers, helped by lenders who happily make loans to qualified purchasers, the better off we will all be as homeowners.