Yes it is true, Banks Are Foreclosing Instead of Doing Short Sales. Some banks like One West (Indy Mac) stated almost a year ago that they would not do a short sale if the foreclosure date was less than 14 days away. Well it seems other banks are starting to follow suit.
Wells Fargo and Wachovia recently announced that they will no longer do a short sale for a homeowner if there is ANY foreclosure date set, and also will not issue an extension on any short sale once an approval letter is issued. They are sending a message out to real estate agents nationwide in press releases and emails that state: “Due to recent industry changes, we at Wells Fargo will no longer be granting any extensions for short sale close dates or postponing foreclosure/trustee sale dates. If you were issued an extension letter dated 9/14 or earlier, those extension letters will be honored, but no further extensions will be granted. Files must close by expiration date on the original approval letter or they will be removed. If your approval expires 9/15 or 9/16, you will have 48 hours to get me the final HUD for approval and close.”
Fannie Mae and Freddie Mac have also stated in their HAFA short sale guidelines that if a foreclosure date is set, it is TOO LATE to do a short sale or loan modification! I fully anticipate that many other lenders and servicers such as Bank Of America and Chase will soon follow suit, and not allow a short sale if a foreclosure date is set.
But why would they do this?
Well there are a few reasons why which I will explain as I have spoken to a handful of high level executives with different banks who have given me their perspective. First, they feel that short sale scams are running rampant, especially when it comes to investors buying shorts sales much cheaper then market value. The process involves the investor negotiating the short sale on the homeowners behalf and then manipulating the value the bank thinks the property is worth. This typically involves the investor paying off the banks appraiser so that the value comes in low and the bank sells it for a deep discount. Then the short sale investor buys it cheap and turns around and sells it for profit right away, making sometimes hundreds of thousands of dollars on the short sale purchase.
The next reason has to do with inexperienced real estate agents attempting to do short sales for homeowners. Many agents are attempting to do a short sale with little or no experience, and complicating the transaction because they don’t know what they are doing. This in turn bogs down the banks from working with experienced agents and causes transactions to get delayed for several months, when in reality a short sale should take 30-60 days. The banks in essence are inundated with inexperienced agents, submitting bad offers, incomplete paperwork, and quite simply taking on a transaction where they have no idea what they are doing. The banks had been previously willing to postpone foreclosures over and over, and extending the process out several months, and when this happens in a declining market, in some cases it works out that the bank would have received a higher price for the home had they just foreclosed several months earlier.
Next, banks are seeing homeowners wait until the eleventh hour in order to request the short sale. The homeowner waits and waits, then tries to attempt a short sale in order to stay in the home longer sometimes with no intention of ever completing a short sale, but simply a stall tactic to stay in the home longer rent free, and the banks are no longer having it.
Last it is important to know that banks typically are just servicers for loans who are owned by investors. Investors are in reality the one putting pressure on servicers to get their properties back quicker and at higher prices so they don’t loose as much money. The servicers or banks are responding by changing policies and accelerating their foreclosure process to what it once was and do them as quickly as state statutes will allow, to try and save money and flush out homeowners who are simply bucking the system to stay in their homes as long as they can.
What does this mean to homeowners and for short sales? Simple. If you go behind on payments and truly want to do a loan modification or short sale, start the process immediately or as quick as you can. Do not wait until the bank has started the foreclosure process as you may find the bank will no longer care and go ahead and proceed with the foreclosure in order to get the property back. This is already happening and the banks are fed up with procrastinators who are trying to buck the system. While I don’t necessarily agree with these policies as it will truly hurt good potential short sale deals for homeowners, I can see their point in all of this.