Take a look a recent article in the Arizona Republic.
I have to say I find the idea that banks are getting upset that real estate investors continue to find ways to profit in a down market incredulous. If the banks want to authorize a sale of a home for more money than they are willing to accept on a short sale, they should find the buyers and stop trying to hide behind their own ethical blunders.
First off, the above article addresses that there are some entities out there (i.e., banks and lending institutions) that suppose short selling a home at once price and then selling it for a higher price is wrong and that if the bank or lending institution knew a buyer was willing to pay a higher amount, they would have sold the home for the higher amount.
Really? Are these same banks who are on a warpath of foreclosures, who ignore loan modification requests from homeowners who are serious about their obligations and who are trying to make the best of their situation, who then offer, at the last minute, a chance for the homeowner to do a loan modification, but then forecloses on the home before the homeowner can even finish the loan modification packet, who continues to make the housing market worse by electing to proceed on foreclosures that continue to depress the housing market, who was the entity largely responsible for the housing market collapse in the first place?
You gotta be kidding me!
The simple answer, in my mind, is that banks, since they are not part of the continuing transaction in this “flopping” scenario, should not be entitled to advocate for industry regulators to look into so called unethical practices of real estate investors. The banks clearly have a conflict of interest in this matter. In fact, they should keep quite altogether!
here is how “flopping” works: a real estate investor finds individuals or families desperately looking to get out of their home without having to go through a foreclosure or bankruptcy. Generally speaking, the home has become unaffordable to the homeowner. The real estate investor spends substantial time, effort, and money to work out a negotiated price of the home that the bank will approve of – its called a short sale because it is a sale for less than what the homeowner owes on the note. The real estate investor then has a buyer willing to pay an amount higher than the negotiated amount of the loan to the real estate investor, who can now close on the home. This is not unethical, this is business, and it the best way to keep a housing market moving while increasing home values (not depressing them). It allows upsidedown homeowners out of a bad situation and allows banks to clear out under-performing debts so that they can focus on higher performing investments. Thus, everyone benefits. Despite this, banks want to complain and insist that regulators prohibit this type of transaction.
Let me just say this – no matter what, the banks and lending institutions will find ways to make money even if it seems like they are losing money. They will always find new products and services to invest in and profit from…therefore, what looks like a loss on paper is really opportunity for the banks. They just want their cake and your cake too (with interest).
Conveniently, we seem to have forgotten that banks were responsible for this mess in the first place – and it was the lack of a cohesive regulatory program monitoring banks and the products they devised that made all of this so easy. Banks were lending money for homes based on inflated markets and a housing bubble that was absolutely unsustainable. Lenders were actively seeking out people with primary mortgages or primary and secondary mortgages to sell them refinancing packages to ”help” them consolidate their mortgages and debt into one loan, one obligation, that allowed you to tap into a bit of the equity in your home to pay off consumer debts (i.e., credit card debt). Without getting into how insane it is to transfer an unsecured debt into a secured one (we’ll talk about that in another post), suffice it to say, that banks were lending money based on an inflated housing market and fraudulent or unscrupulous appraisals that the market could not bear over the long term. Along with “creative financing” (i.e., interest only loans, variable rate loans, pick your payment loans), it was impossible to keep the average homeowner from weathering the financial storm of a bursting bubble. Not only that, these lenders were offering these same loans to the first time home buyer who literally could not afford the home they were about to purchase. In fact, most of us could not afford the homes we were buying; home values had gotten too far out of place with what the average income could actually afford. Nevertheless and despite growning evidence that banking executives knew this and still continued to push these types of loans for homes that were quite simply unaffordable, people could buy a ticking time bomb of a home for no money down….thank god it was at least no money down!
Now these same banks and lending institutions that refuse to work with people who have mortgages that are substantially more than the home is currently worth, are forcing people into two options that basically have the same weight for purposes of a person’s credit rating – short sale or foreclosure. Let’s face it, one year out of the worst recession this country has seen since the Great Depression and people still cannot afford their homes.
Real estate investors actively seek out people who have property worth less than their mortgages so they can help these home owners get out of a bad financial situation. Investors spend upwards of 6 to 8 months negotiating a price the bank is willing take to sell the home. The investor can either pay for this agreed upon amount on his/her own, or can find a buyer who is waiting in line to purchase the home from the investor for an amount the investor and the buyer agree to. This is good business and what we should be encouraging, not preventing.
It alleviates the problem of person having a home they can no longer afford and their need to get rid of it in one way or the other, not only for the homeowner, but for the bank as well. From the bank’s perspective, negotiating a short sale with an investor or any other type of buyer is substantially better, economically speaking, than continuing to force every under-performing loan into foreclosure. By agreeing to a short sale, the bank frees up funds for re-investment and will make more on the sale of the home than it would have by foreclosing on the home.
It just blows my mind that banks and lending institutions should be allowed to complain in any sense about what investors are doing in the market. Listen banks…if you would have worked with your homeowner on a loan modification, you would have likely resolved this problem in the first place. But you didn’t (and don’t) want to go that route. Rather, you insist on foreclosing as your primary remedy (oh yeah, we see that you’re starting to get in trouble for that too). In this “flopping” scenario, you cry out that you are being treated unfairly. But in these situations, you make more money, lose very little (in fact, nothing because you will re-invest and make more money off your investments), and instead of being the key problem to a depressed housing market, you actually help make it better by helping home values increase. Of course, banks and lending institutions, probably by their by-law, are forbidden to make things better for people and the economy in general.
The banks cannot fathom that anyone other then them came up with a way to make money off of people in trouble. Look, I am not saying that there are not people out there taking advantage of the system - those of us who can afford to pay our debts but simply choose not to. The idea that some people who do not pay their mortgages even though they can is shameful. Whenever you can afford to take care of your obligations you should. But the economy over the last several years has left many of us in despair. Lost jobs, reduced incomes, disappearing industries. Times are tough for lots of us and for those of us who are homeowners who no longer can afford our home, a short sale is a good option to re-evaluate our particular financial situation.
Real estate investors are trying to seize on an opportunity to help current homeowners get out of a house the homeowners can longer afford and find a buyer for the home that will allow the investor to make some money for their efforts. If the banks have such a problem with this, why don’t they find their own buyers willing to pay more than what the bank is willing to accept for a short sale? It seems ridiculous at best for banks and lending institutions to say that it is improper for anyone other than them to profit off the work it takes to keep property moving. The banks and lending institutions cannot have it both ways.
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