16 May Why can’t I get a short sale closed? Ask your Senator. Bankruptcy to follow
You are way underwater. You can’t modify your mortgage in chapter 13. The Senate made sure of that when it voted down mortgage modifications in chapter 13. So you decide that you have to sell the house. But it has to be a short sale – the house is worth a lot less than the mortgage. No problem. You’ll call the bank. But then you’llwait for months only to find out that the bank wants at least $50,000 more than the house is presently worth.
For reasons not totally clear, lenders prefer a foreclosure to a short sale. Why? It’s not the economics. It’s about whose ox is getting gored. Because of securitization, the senior layers or tranches don’t take the first hit. The junior or even lower layers do take the hit in a short sale. So they basically just say no. But not right away – only after stringing you along for months.
Even though short sales are a better option for lenders, resulting in loan losses of only 19 percent, compared with an average loss of 40 percent on homes sold after foreclosure,securitization makes negotiating a real estate sale that results in a loss extremely difficult.
According to research firm Campbell Communications, only 23 percent of short sale transactions are actually completed. “Three out of four potential short sale transactions fail, principally because the mortgage servicer takes too long to respond to the offer,” said Tom Popik, author of a February survey of real estate agents. “When these same properties are later sold it further depresses real estate prices.”
North Carolina Congressman Brad Miller says: “The people with the least senior tranches have no reason to agree to the modification because they take a complete loss and the people in the most senior tranches don’t lose anything. So they’ve managed to structure their mortgages in a way that makes it almost impossible to modify or sell short.”
Miller sponsored legislation to reform the bankruptcy code to allow judges to rewrite those contracts, taking away the ability of junior investors to sue and encouraging them to negotiate. But the House-approved measure died in the Senate, 51-45, killed last week by Republicans and 12 Democrats, leaving it 15 votes short of the 60 needed to overcome a filibuster.
Mortgage modifications in chapter 13 would have changed the bargaining landscape. Lenders would have had much more of an incentive to take a loss on a short sale rather than see a judge unilaterally change the terms of a mortgage.
SenatorDurbinbluntly stated that banks “frankly own the place,” referring to the Senate. He told the Huffington Post. “I think many of the banks have not operated in good faith when it comes to this mortgage foreclosure issue.”
Homeowners are the big losers of the banks’ battle against the bill. But real estate agents are now losing real money as commissions fall through, making them a potential lobbying counterweight to the banks. So oddly, consumers and real estate brokers now find themselves in the same boat. Maybe working together mortgage modifications can rise from the dead in Congress. But don’t bet on it. It seems that bank money is much more influential in the Senate than constituent votes. So much for Democracy in America.
If you can’t close a short sale and you can’t get a mortgage modification in chapter 13, figure that you will lose your house and face bankruptcy. We’ll keep fighting for you in the trenches and we’ll keep speaking truth to power for you.
Thanks to the Huffington Post for much of the material used in this article.
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