As more short sales take place on the west coast, the California legislature is struggling to determine what is “fair” for lenders to require of homeowners attempting to avoid foreclosure. While many homeowners may already be leery of short sales thanks to the fact that the amount of money that they are “forgiven” can end up on their income tax returns, west-coast lenders are up in arms because they may be prohibited from pursuing deficit judgments against homeowners with whom they do short sales but that do not pay off the remainder of their loan.
One legislator has suggested a compromise: homeowners should be forgiven the amount of their original loan, but refinanced loans that were used to deplete the equity from the home will not be forgiven in full. So if you owed 250,000 dollars on your original loan, then refinanced to get 100,000 in cash and bloated your loan to 350,000 dollars, you would remain “vulnerable” for 100,000 dollars. Of course, this may catch homeowners who refinanced to get lower interest rates.
There is some serious concern in California that so many people have deficiency judgments against them that a large portion of the population will never be able to buy a house again, reported the New York Times yesterday. While this does represent a potential problem, it’s probably still better than re-establishing the foolish scenario that allows unqualified or financially unfit individuals to acquire home loans in the first place.
What do you think should be done to deal with bloated home loans that will probably never be repaid in full?
Thank you for reading the Bryan Ellis Real Estate Letter. Your comments and questions are welcomed below.
I believe the homeowners should be given a deficiency judgement on the home equity loans. When they stripped out the equity and took the money they knew exactly what they were doing. Too bad the banking industry was so irresponsible with credit and this entire mess had to happen.
The concept of retroactively punishing people or a company for something that was done before the law/regulation/legislation existed is just plain assinine.
How can anyone conduct business or even life is you never know what the rules are going to be next week. You don’t!! You become very conservative with everything you do in business or life and we have negative growth in this country. You hoard money because you know that next week something may happen and you will need that money to defend yourself.
The whole concept goes against what our country is about, taking risk and being rewarded for taking those risks. If we had had people never taking risk, we would mostly be living in the Old World wonder what was across that big body of water that was too scary to cross. If we never took risk and received reward for it we would not be using personal computers to talk to each other. If all of the risk becomes dictated by government, we will cease to exist as a viable society and collapse overnight, to become a foot note in other countries history books if anyone even bothers to take the risk of printing one!
Three observations regarding resolution of deficiency debts…
One, our experience with scores of short sale transactions is that the deficiency clause can be negotiated out of the short sale settlement agreement in about 80% of the cases, often with just a small increase in costs paid by the Buyer. If the seller’s agent or attorney did not push back to get the lender to negotiate that clause out of the deal, then probably that agent’s errors and omissions policy should be asked to negotiate and cover the deficiency payoff.
Two, for the homeowners in the other 20% of the cases where the negotiation regarding the deficiency clause isn’t going well. these homeowners should really discuss their options with a properly qualified attorney… before signing off on the short sale… to understand clearly ahead of time how they might best respond to a future collections law suit from the lender. (If the state legislature wants to provide or subsidize this type of counseling…that would be a good thing)
Three, If the state legislature over-reaches and strips the lenders of their rights to negotiate a mutually agreeable settlement… that would most likely cause the availability of Seconds and HELOCs to diminish… and the interest rates on these loans to rise…Not good for anyone.
Simple: The Crooks who caused this in the first place should eat the losses and re-cast every single loan in which the borrowers are still at least attempting to pay the mortgage, to today’s values at a low fixed rate and let them stay in the property. The Retail Real Estate industry, Banking Industry and Wall Street need to pay for this one. And until they do, this Country will never stop this type of activity from happening again. And while I am at it I should also say this: Congress, the entire lot of them, needs to be replaced. They knew what was happening but because the largest contributors to independent campaigns are the Real estate and Banking industries, and of course Wall Streeters, they simply waited until the public began to take notice and make noise, then simply bailed out the crooks to a tune of more than 700 Billion Dollars. Of our money. Not theirs. Ours. What the hell was that all about? Huh?!
Its not a good idea to try to get the homeowners to pay back any of the deficiency in a Short Sale. First, the homeowner can’t afford it or he wouldn’t be in that situation in the first place. Secondly, if that is going to happen the homeowner will just let it go to Foreclosure, and the bank won’t get any money anyway. And as we all know, it will cost the Bank even more to acquire the property thru Foreclosure
I like Gregnaro’s observations, and I’ll add a few of my own.
Whether or not the lenders get the deficiency judgments, they’ll still be made whole on all of the loans with PMI. They’ll simply file insurance claims, and write off any losses.
Unfortunately, a lot of people (bankers, politicians, real-estate agents, etc) made a lot of stupid mistakes that appeared to be brilliant moves–at least to some people–a few years ago. The blame game needs to stop. There’s more than enough to go around, and there are too many culprits to target. Let’s move on. We’ll focus to make more efficient and better use of our resources (including time) by resolving the problems, and refortifying the infrastructure.
Creative financing is another way to work around short-sales and deficiency judgments altogether. Basically, one can structure the terms to mitigate any of the issues that arise in a particular deal.