Not every home owner lays down and throws in the towel when faced with foreclosure. Many go for the short sale, where the bank(s) are asked to take less than what is owed on the loan(s). Most short sales have been unsuccessful, but a few are making it through to a sale. How short will the lenders go, and what does that tell us about out market?
I don’t know of any database that tracks short sale results. So unless you have been tracking a property, there is no way to identify a sale as a short on the Recorder’s site – they just show up as standard Deeds of Trust. But through my treasure trove of properties held by the Sinners, real estate industry professionals with large portfolios, I have been able to track the results of a couple of short sales.
6272 10 Mile Court was purchased in April 2006 for $450,000 with a $360,000 1st and a $67,500 HELOC (95%). The NOD was filed in March 2008, and I tracked it listed for $350,000 in April. It sold in June for $315,000. The 5% down payment was wiped out, as was the 15% HELOC 2nd loan. The 1st loan was written down an additional 12.5% to close the sale. The property lost 30% of its value between sales.
2209 G Kietzke was purchased in August 2005 for $151,000 with a $120,800 1st and a $22,650 2nd (95%). I tracked it as listed at $139,000 at one point, and reduced to $79,000 in July. It sold in September for $70,500. The down payment was lost, the 2nd was wiped out, and the first was discounted about 42%. The property lost 48% of its value between sales.
The market "standard" on short sale listings these days seems to be about 64% of the peak purchase price – 100% x .8 (wiping out down payments if any, and all 2nd loans) x .8 (market adjustment). I’m not convinced this is enough given where we are today.
This is not meant to be a "definitive" post in any way, just a few examples of what short sales are actually closing for. If you have examples that merit data-digging, let me know. Just beware, you may not want know the results!
cash buyer
we are entering a recession, next president will increase taxes, our currency along with world currency in turmoil, and consumer confidence at record low levels, so this is just the beginning. sellers looking for a return to 2004 glory days are unrealistic……….and the realtors continue to call the bottom. thank goodness for diane, guy and their honest site.
Sully
I think the second example would be the most likely scenario for a standard. But with Ben & Hank running this Chinese Fire Drill, who knows – may be even lower.
smarten
Good subject Mike.
My question is WHY do short sale sellers list ANY price at all? Whatever prices they come up with are basically immaterial because the lenders eventually set an acceptable price [assuming they agree to a short sale]. And since there’s nothing left over for the seller or the agent [the bank will dictate the commission], who is the seller or his/her agent to dictate what is/not an acceptable offer?
Let me give you an example: 346 Winding Way in Incline Village. This one’s interesting because the owner is a former mortgage broker who got to cute for his own britches. The typical negative amortizing purchase money ARM followed by a HELOC second [with the same lender].
The home has been on the market for nearly a year and it has come down $200K in price to its current $1.599M. The agent [Chase of course] didn’t even realize more was owed against the property than their listing price until I educated them [BTW, the second such listing of theirs unlicensed me had to educate them on (678 Fourteenth Green if you’re reading)]. They wanted me to come in with an offer just to see what would happen. I refused because they hadn’t even attempted to work with the lender on a short sale and their seller refused to pony up the deficiency at C.O.E. Now the property is being advertised at the same sales price, however, now as a short sale.
I want to come in with an offer at about $1M and the bank will either agree or not based upon ITS own determination. But I know damn well neither the agent nor its principal will “accept” my offer subject to the bank’s approval so it can go to the next level because they will think my offer is too low.
My point is if you’re going to advertise a property as a short sale, by definition, shouldn’t you lose the ability to reject ANY offer?
Future Buyer
To add to cash buyer’s concerns, I used to think we could call the bottom when housing prices reverted back to 2003 pricing (pre-bubble). Now with the economy entering a global recession with no way out–no matter how much they lower interest rates or pump money into the banks, it’s looking much more bleak. No candidate is going to be able to lower taxes and there is deep fear of a raise in taxes and the effect it will have on the employer and what little jobs are left. Add the looming credit card crisis in the wings and you have a recipe for utter disaster. Consequently, I think we are headed for a drop to at the very least 2001 levels–whatever year that may be or how long it takes who knows? I don’t try to time it–I prefer to price it, but even that is a moving target. In any case, now I’m with BB in saying there is going to be an over-correction and a lot more short sales to come.
longerwalk
I find this an interesting article about the composition of the group of homeowners who are being foreclosed upon. Comment?
http://www.realclearmarkets.com/articles/2008/10/foreclosure_myths_can_media_ha.html
El Diablo
Not to get off topic but interesting news, Corus Bank, the lender on the Montage project released their Third Quarter report and The Montage is now listed as a nonaccrual loan. I suppose that means they are not getting paid from the Montage right now. Further, the report states that Corus is currently forclosing on eight of its nonaccrual loans, but does not mention Reno specifically. Here is the link to the Report see page 11 http://www.corusbank.com/acrobat/Q308.pdf
billddrummer
To El Diablo,
As far as the Corus financials are concerned, it looks to me like the bank elected to add the loan to the nonaccrual category not because it isn’t paying interest (the loan is a construction loan with an interest reserve, and it didn’t indicate that funding had been shut off because the commitment was listed as available in the statements), but because they’re not sure how they’ll get taken out at the end of the construction period.
Banks will place loans on nonaccrual if the primary repayment source goes sideways–in this case, mortgage loans on sold units. It may be that the bank is seeing erosion in the number of closings expected, which will make it harder to sell off the project if they want to exit.
I work in commercial banking.
GratefulD_420
Smarten – I so agree about the inefficient ‘short-sale” process.
— If I was the bank, I certinly would like to see all offers from recently pre-qualified buyers.
Unfortunately under the current process, the owner’s should NOT accept any offer. The reason why is that once they have accepted an offer and submitted to the bank they cannot accept other offers. Therefore they are afraid to take a good low offer… for fear of losing 2 months before the bank comes back with a “no.”… and in the meantime someone with a better offer has walked. Especially the case if they are in defualt.
Does anyone know an appropriate way to communicate to the lender directly?
smarten
A bit off topic but I just learned something potentially of interest to the group. Apparently the FNMA/FHLB conforming loan amount limits are being permanently increased nationwide before the end of the year. The number I’ve heard is somewhere in the $620K range. As many may know, that current limit is $417K in Washoe County.
With 20% down, the new conforming loan amount would in theory extend to purchases of up to about $785K – essentially most of Reno/Sparks [in the current market we’re in].
Now combine this fact with what SHOULD be the drop in mortgage interest rates [IMO they’re still a good 1% higher than they should be (but that may be changing within the next 4-6 weeks)], and if you’re a borrower who can document your income [to today’s higher standards], the end of the year may be an ideal time to buy – at least insofar as purchase money financing is concerned.
I understand this has nothing directly to do with the price of housing [although it may indirectly increase demand if this and other changes causes the credit market to loosen up], but long term financing is a very key component in the purchase of housing.
Something to keep an eye on!
CommercialLender
Dovetailing on Smarten’s post, in the commercial lending market, we are seeing a few things that may have relevance to the single family lending market, at least as it concerns overall mortgage rates. (Smarten theorizes they should be coming down in the coming weeks).
We index most fixed rate loans on the UST (10 yr, 7 yr interpolated, 30 yr, etc.) and ARMs on LIBOR, generally. And while the treasuries are very attractive (3.94% today), the spread the lender would charge is steadily higher, very high, in fact. My life insurance companies are big commercial lenders, but they are now looking at the relative risk differential between putting money out as a mortgage for ~7% versus buying AAA rated GE bonds (and others) well into the 8%’s. So, while in a ‘normal’ market we’d expect the recession to provide lower rates. We absolutely are seeing this now on the short-end of the yield curve in Fed controlled indices. But because those companies see so many other investments, particularly corporate bonds, yielding much higher returns, we are now experiencing a decreased flow of money into commercial mortgages and increased overall pay rates.
I suspect the single family lending market is quite similar. Why put money out the door at 6% ish rate, risking asset devaluation and risking borrower defaults via job losses, etc, when you could hoard cash and invest in safer investments? Indeed, that is what is and has been happening in this ‘credit crunch’.
Smarten, admittedly not knowing the single family lending market well, from my study, I completely disagree with your assessment that rates are coming down ANYTIME soon.
*****
All, you need to prepare yourselves for the reality that the party is over, namely, the flow of cash into the mortgage market directly contributed to the rise in values of leveraged assets (homes, cars, hedge funds, etc.). We all agree and have discussed ad nauseum. But let’s not lose sight of the fact that the flow OUT OF these markets is happening and will last just as long as the flow into them did, give or take. This outflow will last several more years, yes, years.
Lenders know/suspect this to be the case, so regardless of Jumbo limits, they have little interest or incentive to write mortgages to anyone but the very risk-averse borrowers, and for an indefinate time period to come. My own opinion? 2011-2012 at the earliest.
Those of us who make our livings in real estate, if you are not well-healed financially enough to survive a lean few years, have not been thru a down cycle before, certainly if you came ‘late to the party’ since say 2001, you should very seriously consider switching careers entirely. At the very least, and for those of us who’ve been around longer, you need to manage your expenses to bare bones minimums as the hayday of the past few years will not be back anytime soon.