Lake Havasu Real Estate

Foreclosure Stoppage Information

A hugely important action has been taken by many major lenders: “Concerned about the paperwork” many have stopped foreclosures to “conduct reviews” and otherwise obfuscate just what the heck is going on in the marketplace. The question is, “What will be the net effect of this development?” As we will see, that question has a baseline simple answer.

How do lenders benefit from stopping foreclosures?

In the big scheme of things, they want this crisis to be resolved as much as the rest of us do. There's almost nothing positive they gain with this development, but collaterally (no pun intended), there may be some benefit for them. Simply put, that question must be considered through two different lenses: 1) in the short term; 2) in the long term.

Lenders benefit from stopping foreclosures in the short term by:

·        Stopping, if only for a short while, the charge-offs made when a property goes into foreclosure proceedings once 90 days or more delinquent. Remember that each institution must charge off the entire mortgage and deduct it from their equity each time a foreclosure commences, only able to regain some of their putative loss upon selling the property down the road. Regardless of the property’s intrinsic value, once foreclosure commences, the property is on the books at zero.

·        Camouflaging, also temporarily, just how bad the problem really is in today’s marketplace and  giving their potent lobbyists a chance to extract some governmental relief (for them, not necessarily for the homeowner).

In the long term, those lenders may benefit by:

·       Benefiting from sympathetic legislation that those lobbyists succeed in arranging;

·       Benefiting by the slow but persistent increase in the economic cycle;

·       Having more time to sell or liquidate more of the properties that are in this “limbo” awaiting further review, thus reducing the negative impact to their balance sheets.

Therein lies the tale: it is in the bank’s best interests to liquidate as many of these loans as possible before having to charge them off, and that seems to indicate that short sales will continue to become a more important part of every agent’s sales.

Lenders benefit from short sales

You might wonder how a lender “taking a haircut” and selling a property for much less than is owed them is a benefit. Simply, arranging a short sale allows the bank to limit the charge-off and reduce the impact to both earnings and equity that charge-offs produce.

For example, a property mortgaged for $500,000 is best sold for $300,000 rather than written down to $0, wouldn’t you agree? Now, as we come up on the economic “end of the fiscal year” for most lenders, it certainly is better to either postpone the problem (as is now the case) or to liquidate the properties and manage the loss amount before the lenders auditors tell them to. It gives lenders a chance to dial up their own earnings, do their tax arranging wisely and insulate themselves as best they can from the scorn of the marketplace.

If lenders benefit from short sales, why is accomplishing one like pulling teeth without anesthesia?

I’m afraid you’ll have to ask them. There is no reason to stall or drag out short sales other than the same reason homeowners still think it’s 2005 when pricing their homes for sale on occasion: Neither of the parties accept that those prices are gone forever and they sometimes are secretly hoping for a government bailout like that of the eighties when the authorities invoked a fallacy called “negative goodwill” to insulate the buyers of troubled thrifts from the economic ruin required under Generally Accepted Accounting Principles (GAAP) and federal agency regulations: “We’ll just make up a way to ignore all this red ink and move ahead.”

Of course, no lender wants this situation to continue and you can be sure that they are as eager to get through this foreclosure mess as you are. Of course, it is their greed that caused the mess to begin with; that, and the ancillary feeding frenzy of the mortgage banking industry eager to close any loan with any borrower, whether that borrower could repay the loan or not. After all, as soon as they packaged and sold the loan they were out of the deal, so what was the harm in just passing the buck to the "public funds" that ended up "investing in" this trash, anyway?