INSANITY - PART 2

by Craig

Well if you read part one then you know how insane banks can be. Here is yet another example of a tragically insane policy from a bank.

In a small city called Maricopa that is about 30 – 45 mins outside of Phoenix- a small community became a big one in a couple years.  The town quadrupled in home counts when there was no industry or jobs to speak of -- just cheap land that builders figured they could build on and sell since we were in a boom. Just build it and they will come.

Well you know the story… so now every builder has pulled out and subdivisions are left incomplete. Home owners are seeing their values sink because, without sustainable industry, why would anybody drive 30-45 mins outside the metropolitan area to live when they can now find extremely low priced homes in the Phoenix market on every block.

So one home owner decides to sell his home on a short sale – (short sale meaning that the home is sold for less or short than the amount needed to pay off the loan)  All you need is a willing buyer and seller and bank approval. The home owner had two loans on the home. 

To make numbers easy lets say the first mortgage was 225,000 and the second was 50,000.  Total = 275,000. Every home in that city is upside down. They found a buyer to pay 200,000.  So the buyer and seller agreed and sent it to the bank for approval.  The first mortgage holder said OK we agree to the price and we will pay the second mortgage holder 4,000 dollars from the 200K that we get.  Both the first and second lenders agreed so everybody seemed happy.
 
So here is where the insanity comes in  - the verbal approvals were given and all parties continued on to the closing. But the written approval from the second lien holder took a few weeks to arrive and when it did there was a very strange sentence.  It went something like this…”This approval is based on the seller being liable for the remainder of the loan amount”  Say what?

Let’s examine this…

• The second mortgage company is owed 50,000. They agree to accept 4,000.
• The first mortgage agrees in writing to give the second 4,000.
• The buyer and seller are willing to close at 200,000.
• So far everybody is happy and moving towards a closing. . .

• The buyer signed the docs and their lender funded the loan which means they wired the 200K!
• The seller can not sign unless he agrees to be liable for the remaining 46,000. 
• If the seller signs this he will owe 46,000.
• If the bank forecloses he will not owe the 46,000. What would you do?
• The second said they would not remove the wording and would accept the 4,000 only if the seller agrees to pay them back the remaining 46,000 as well and if not - - - then they will foreclose… (music cue / dun dun dun)

How insane is this – if the second mortgage company forecloses on this home and they are in SECOND lien position the home will be sold at auction or re listed and the money from the sale will go to …. The FIRST mortgage company!

That’s right if they sell it for 175 then the first mortgage company gets 175!  How much does the second mortgage get at that point – zilch – nada – zip – zero – nuttin' honey! 

So when a bank can take the 4,000 and move on, but instead threatens to either be paid ALL OR ELSE, they will foreclose.  If they foreclose they get nothing! That in my opinion is insane!

Our country needs liquidity right now – isn’t that the reason we had a 700 billion dollar bail out plan pass to give the banks liquidity? So here was 200,000 in the title company’s possession and within hours the first mortgage company would have been gotten 196K and the second would have gotten 4K – as of today they have nothing AND they are still sitting with non performing loans which costs them money every month on their books. ISN’T THAT A LIQUIDITY PROBLEM? 

What if they would take 50,000 more short sales and get 196K from each one of them wouldn’t that help banks liquidity? It would also remove 50,000 non producing notes off their books.  Common sense would tell you that banks would be better off with LESS non performing loans and MORE money in their accounts right?

When they start moving the short sales through the system with more sanity, then it would ease the liquidity crisis nationwide and reduce the number of foreclosures in the nation, reduce the non performing loans in the country, keep the housing prices from further sliding downward, stabilize the markets a bit more, create less credit problems for home owners, increase the number of homes coming off the market, increase the number of realtor commissions which would decrease the number of agents leaving the industry, increase more good loans, keep more lenders and title companies working… do I need to go on or do you get the picture?

Yes, you get the picture - - but the banks don’t.

Comments

[david wilson]

The lender is paid off by insurance if it goes into foreclosure. Also, when they foreclose or short sale, it ends up showing as a lost asset. (Before this, they have it off balance sheet, or as a performing asset. Accounting rules have been thrown out the window.) Also, they are waiting for the bailout, if it gets to them. Nuf' said??

It's all about phony accounting and lies. You know the "appreciation" of at least 100% in the Phx metro area during 2004-2005, not to speak of the remainder during 1998-2003, and 2006.

Fundamentals have been thrown out the window. That's why when my parents sold their farm in 2003 for 500k in Nebraska after having it the family since 1880, it was a terrible mistake. Prices on average have gone up there about 77% since 2004!! There goes 400K down the toilet. Since the 1970's the net income became smaller and smaller, until 2003 it was impossible to make any profit!! So much for Reagan's trickle.

Everyone yaps about 750Billion. (The true cost will be between 5 and 10 trillion.) During 2008 alone, corn farmers in the US got $$$100's of billions for doing NOTHING. Only to very large corporations, never small farms, of course.

Does this help explain why the fundamentals don't even exist anymore? I hope so!

[Craig]

Thanks david for the comment to the original post. You make some very good points. You stated "The lender is paid off by insurance if it goes into foreclosure" - - Actually in this scenario where there was a first and a second there is NO insurance for the lien holders. With a first and second mortgage you avoid mortgage insurance.

Many times when there was only a first mortgage you are right they do have an insurance policy on the mortgage.

Your comments about phony accounting are dead on and that is one of the core issues of the entire crisis in this country.... that's another post!