Out of the ash of the mortgage meltdown-bubble bursting-long lasting recession has come a new type of seller. One that has learned how to manipulate the many programs offered by banks to help those that simply cannot afford their house. Unfortunately, in the end, we all pay the price.
Where did this come from?
For the most part, San Carlos has been immune from a flood of short sales and foreclosures. Because we have been almost entirely immune from these types of transactions, many in San Carlos are unaware of just how corrupt the system has become. Word has gotten out on how to manipulate the short sale system and sellers are taking advantage of it. We are starting to see this manipulation locally and on a more frequent basis.
What is a short sale?
A short sale occurs when a bank or banks (depending on the existence of a second mortgage), agree to accept less than what is owed to them as a full a final payoff on their mortgage balances. Banks have been agreeable to short sales because it saves them the time, effort and expense of going through the foreclosure process. The short sale works well for sellers because it allows them to get out from under the mortgage and the short sale will not have the same devastating effect as a foreclosure on the seller’s credit rating.
Those who manipulate the system vs. those who are truly in trouble
The sad part about short sales is that there are families who have truly hit a streak of bad luck and have no choice but to short sale their house. Unfortunately, there are others who are using the short sale process as a way to work the system every which way possible in order to net a substantial financial gain. The issue I have with this second group is that they are getting away with a financial gain, while everyone else who has worked through a very difficult recession to keep their home, ends up paying the cost of their financial gain through higher bank fees, lower property values and higher taxes.
Here is an example of how some of these folks have worked the system:
Sara Seller buys a home in 2003 in San Carlos for $900,000. Sara Seller’s home appreciates in value to $1,250,000 by 2007. Sara Seller applies for a second mortgage and chooses a cash out refinance. Sara Seller takes the $350,000 and pays $100,000 cash for a two new cars, and puts the other $250,000 into a variety of account such as retirement, vacation, and a college account for her kids. By 2009, Sara Seller’s home has dropped in value from a high of $1,250,000, to $1,075,000. Sara Seller has decided that she no longer wishes to make payments on the home because her business has hit tough times and she is stretched too thin. Additionally, she realizes that the house is now $175,000 under water and does not want to wait around for the home to appreciate back up to its 2007 value.
Sara Seller decides to attempt a short sale. The first thing her realtor tells her is that the bank will not take a short sale seriously until they stop receiving payments. Sara Seller stops making her monthly mortgage payments and puts the home on the market as a short sale, subject to bank(s) approval. Sara Seller’s realtor has correctly informed her that since her house is a short sale, she will need to put the home on the market at a slightly discounted price. If she does not do this, buyers will not be willing to stick with the long, drawn out process of a short sale. Sara Seller puts her home on the market for $975,000. Sara Seller obtains an offer for the full list price of $975,000 and starts the short sale process with her banks. If the short sale goes through and the second mortgage holder agrees to waive their deficiency rights (as is what happens in most successful short sales), here is the net effect:
(1) Sara Seller is no longer liable for the mortgages on the property.
(2) Sara Seller keeps the two cars that she bought for $100,000 which she owns outright as well as the $250,000 that she dropped in other retirement, college and vacation accounts.
(3) Sara Seller gets to keep the money she pocketed for the six to seven months of not paying her mortgages.
(4) The banks lose a combined $275,000, plus another $45,000 in real estate fees.
(5) All other homes on that particular street and surrounding area just had their property values lowered because of the new low comp via the recent short sale.
Are there any corrective measures being put into place to stop this?
Banks have gotten wise, but are still playing catch-up to some of these seller tactics. Some of the data released recently for California suggests that banks have scrutinized the applications of short sale sellers more carefully and have only been approving the sellers that are truly destitute. There is also talk that the Franchise Tax Board may go after some short sale sellers for the tax due on the deficiency amount, in the above example this would be the tax due on $350,000. Finally, many banks are feeling as though some areas of the country have recovered to the point where they do not need to necessarily accept short sales. In other words, they are willing to go through foreclosure and get more of a financial benefit on the sale after foreclosure. In any event, it is still a deeply flawed system that has been fully exposed.