Predatory lending is an insidious practice. Those that make a short term profit at the expense of another person’s financial health are criminals. Of course, they know little of the damage they cause, but those of us who try and pick up the pieces know that harm all too well.
I was called to meet with an elderly couple in White Plains, and a family friend was also present. I thought little of it in the beginning, but as I came to learn of their circumstances, I understood that the friend was there to ensure that they wouldn’t get hurt again. About a year earlier, a mortgage person convinced them to refinance their home with an option-ARM, which is a very exotic product intended as a short term loan for investors. I am sure the loan officer made a healthy commission, but these people belonged in this loan as much as Stevie Wonder belonged behind the wheel of a Ferrari.
The way it works is that the interest rate is artificially low in the beginning period, and then the difference between the note rate and the market rate is added to the loan principle each month. If the ARM (adjustable rate mortgage) rate is 2% and the market rate is 7%, that month’s 5% annual interest is the amount that the loan amount increases. The low payment literally cannibalizes equity. Investors like them because the teaser rate is low, and by the time the adjustable rate period is at hand the home is resold. Not so for a long term owner occupant. By the time I had gotten there, they had realized that tens of thousands of their equity had disappeared. Nobody explained this to them, or, if it was covered, it was sped through so quickly they didn’t know what hit them. To make matters worse, the loan had a prepayment penalty, which is incredibly rare in the state of New York.
The clients were understandably mistrustful of anyone who promised to help them, and it was only their friend’s presence that convinced them to work with me. For the entire period of the listing (it took almost 7 months from listing to closing) we never met alone once. There was always a friend or relative present. I didn’t blame them, and I actually preferred it that way, because every new person that met me became an ally.
It was a tough sell: we had subordinate financing, a prepayment penalty, a very outdated house, and the sale price of comps was still high at that point because the market decline was in it’s infancy. Even if we brought an offer, there might be appraisal issues. They also had a large amount of personal belongings to move, a difficult task for elderly, infirmed people.
We did get an offer, and the work began on negotiating the short payoff. One piece of good luck came through when a local non-profit that the clients contacted on their own got the pre-payment penalty disallowed (another example of people doing something to help themselves rather than curl into a fetal position). In our process we have the buyers sign a conditional contract, contingent on bank approval of the short sale. These things can go on for months, and there is always a danger of the lender giving the buyer an “out” by countering at a higher price. After weeks and months of frustration and waiting, the buyers did become nervous. I spoke with their agent quite often, and much of the discussion was reassuring them that we were confident we would get the deal done.
The approval did come through, and with a rare caveat: an unsecured note of $30,000 would have to be paid back by my clients. The lender would allow them to sell and release the lien, but the bank wanted another $30,000. The term was advantageously long and the rate low, so the monthly payment would be a fraction of a $30,000 car for example, but it was a post closing obligation. This is exceedingly rare; we had little choice. It was either that or foreclose. The clients accepted the lender’s terms.
They are renting now, and their expenses are far more in line with their fixed income. The stress is alleviated, and in spite of the small compromise they had to make with the lender to make the deal work, their quality of life is far better. In a perfect world, I would hunt down the loan officer that put them in that option-ARM and make him pay back the $30,000.
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New York Short Sale Team 
When Everyone Walks Away with Money Exept the Seller
Posted in Commentary, tagged avoiding foreclosure, preserving credit, proceeds on March 26, 2011| Leave a Comment »
Just about every home sale is stressful on the seller. A short sale, given the higher stakes and financial ramifications, often has even more stress for the seller than a typical transaction. On a few occasions, I have had a short sale client lament that they are “left out” in a way, in that everyone is going to walk away from the closing with money except them. Short sale sellers realize no proceeds at closing.
I recall the first instance where this occurred; the seller didn’t really want to sell, and was dismayed at what her perceived as a feeding frenzy around him over his loss. The agents were making a fee, the lawyers were getting a check, and he’d lose his house. It didn’t seem right to him. The listing expired unsold 3 years ago, and it remains unsold with the 3rd listing agent. I don’t think the people could let go.
So what it in it for someone to do a short sale when they don’t get any money? Quite a bit if you ask me.
You avoid a foreclosure. A good point was made by the Distressed Property Institute in the CDPE course: negative trade lines lose their punch and fall off over time, but the one question on every mortgage application is “have you ever had a foreclosure?”
You leave your home with dignity. That goes for you and the neighborhood. Anyone who sells their home moves out on their own terms. Nobody evicts them, and nobody knocks on the door informing them he represents the lender and the house is now theirs. Short sale sellers pack their things and move to their next home like anyone else. And the neighborhood avoids the blight of a bank owned REO and all the baggage that comes with it.
You minimize the impact to your credit. A foreclosure is a nuclear event in credit. I could name nothing worse. While many people who do sell short have late payments, if they manage things correctly they can often be qualified to buy again in 24 months.
You avoid a deficiency judgment. A properly negotiated short sale typically results in the waiver of any deficiency. The slate is wiped clean. As I told my former client, if he just let the house go to foreclosure he wouldn’t get any money either. Worse, a deficiency judgment could haunt him thereafter.
I suppose there are other reasons, but to those who view a short sale as unpalatable, I would ask what they’d propose as a better option. Sometimes you have to choose your poison. Banks aren’t modifying loans these days- as a matter of fact, many of my clients came to me after they were turned down a 2nd and 3rd attempt to modify. You may not walk away with money in a short sale these days. But in a successfully negotiated short sale, do do get something few people consider: a second chance.
To add one more point, there are programs coming into prominence that do offer sellers a small stipend in a short sale, some as much as $7,000. I saw a letter from Chase today referencing up to a $20,000 credit for a short sale. I am sure the small print is copious for that, but HAFA is the first place we are going with our clients in short sales so they can get a credit from their lender at closing. Not every short sale broker is alike. You need a good one who knows how to get the debt discharged and the deficiency waived.
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