Short Sales: Loss Mitigation or Loss Enhancement?

J Philip Faranda December 15, 2008

I cannot speak to the Wall Street side of the matter, but it was bad loans that started the dominoes rolling in the current down cycle we are all working through. I therefore have little confidence in the lenders’ judgment, especially where it concerns working out a short sale. I have done dozens of short sales; very few go smoothly. I have an outstanding attorney deal directly with loss mitigation because he gets his calls returned faster than I can and he has been doing this for over 15 years. At any one time we have about half a dozen short sale workouts in the pipeline.

In my experience, the weak link is the appraisal or BPO. Demonstrating hardship is typically not difficult. Getting an offer is more of a challenge, but we are getting them. Unfortunately, once we get to the appraisal the real challenges arise. Most of the time, the lender inexplicably gets as appraiser from a far away place, sometimes two counties away. Why? We are in the suburbs of New York City, not a remote rural area. There are dozens if not hundreds of appraisers who know the local market. Calling in someone from Long Island or the Catskills (I am not exaggerating) seems ill-advised. So what happens? The appraisal comes in $50,000 higher than the multiple offers we have, and the deal tanks, often putting my seller client in a precarious position.

Bringing in an appraiser from outside the market is a deplorable move. They aren’t more objective, they are simply more unfamiliar. Instead of evaluating what is right before their eyes, they submit a robotic valuation based on raw square footage and what few “comparable” sales recently closed, while ignoring the gigantic unsold inventory which is rotting at their “market value” as well as the significant repairs often needed on the subject property.

The lenders are not doing themselves any favors when they do this. If the workout fails to close, they have a non-performing loan for another 3-9 months, the property falls into more serious disrepair, they incur more legal fees, and the HOUSE SELLS 6-12 MONTHS LATER for $50,000-$100,000 LESS as an REO. Meanwhile, I have wasted my time and my client suffers the humiliation of a foreclosure even though they made a good faith effort to do the right thing.

This is not loss mitigation, it is loss enhancement. Lenders do not seem to grasp that prices are coming down, that we have years of unsold inventory piling up, and 80 cents on the dollar today is better than 60 cents on the dollar in 90 days. By far, the biggest offender is Countrywide. Other lenders are not faultless, however, and I really don’t have a solution. This should be common sense, but anyone who has dealt with some of the drones in loss mitigation know that common sense is not common, it is rare.

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