I’m repeating myself, but as I was updating my database I came across a few old files that reminded me that lenders don’t always do the logical thing. There were several instances, for example, where the lender refused to approve a short sale that would have had the asset cleared off their books immediately, opting instead to eventually foreclose and netting tens of thousands less in revenue.
Take, for example, a home on the market for $400,000 with a mortgage balance of $450,000. In a short sale the bank does eat that $50,000 loss, but if you compare that loss to the hammering they’d get with the same property in the foreclosure process you’ll see what I mean.
Let’s say the lender on the the same property declines approving the short sale for $400,000, and eventually forecloses. And let’s say they foreclose 6 months later, which is generous in an environment where I’ve seen the process take multiple years. That’s 6 months more taxes, 6 months of more accrued mortgage payments not made, and the legal fees of foreclosure. The lender will then take another 6 months after repossession (again, that’s fast in New York) where the expense of eviction, cleaning out, and preservation pile up, all while the home loses value. True, the bank could renovate the home, but that’s more time and money, with the same economics of return on investment that make most regular sellers opt to sell as is.
It isn’t even close. In the first example, the lender loses $50,000 plus commission and closing expenses. In the second example, they lose more than $100,000 easily, possibly twice that if there are any hiccups. Yet I have seen banks do this many times. In virtually all those instances the property was distressed an inordinate period of time and the lender was awkwardly trying to recoup their losses.
The takeaway here is that the sooner a homeowner acts, the better chances they have of avoiding a bad decision from a lender’s loss mitigation department.
