Apparently Chase has been pursuing homeowners to enroll in their Short Sale Outreach Program. They are sending letters to certain mortgagors, offering up to $30,000 to people who are behind on their mortgages, to try to short sell the property, rather than letting it go to foreclosure. They promise to give approval within a short period of time, and to forgive any deficiency. There is one catch, the mortgage has to be owned by Chase (not merely serviced by Chase).
Why would they do this? Because they understand the math involved in a foreclosure. The mortgagee (holder of the mortgage) usually loses a huge amount of money if the property goes to foreclosure. In Florida, the average time from beginning to end of a foreclosure is over 600 days! [Editor’s note: nationally, the average is over 500 days.] That’s almost two years worth of interest lost, real estate taxes and legal fees that have to be paid and association dues owed.
When you include the deterioration to the property, the loss in value overall, lenders are lucky to recoup 50% of the money owed on any foreclosure. The average price discount on a short sale is 12%, while on an REO it is 25%. It is much cheaper to pay the delinquent homeowner to get out, than to go through the entire foreclosure process.
The real question is why are they not being as aggressive on the loans which they service? Again, they understand the math involved. Since it is not their money being lost in the process (they already sold the loan to an investor, who is taking the loss), there is little incentive to stop the bleeding. And, the financial remuneration involved in servicing the loans actually goes up once a loan becomes delinquent.
As the servicer of a loan, a bank gets paid a small percentage (usually about 0.25%) of the principal balance of the loan, to take in the monthly payments, and distribute the money (taxes, insurance, interest, principal). But, when a loan becomes delinquent, they raise the percentage (to over 0.5% – doubling their income), charge late fees and make money on force-placing insurance. This means that if they encouraged modifications or short sales of these loans, servicing income would decrease dramatically (since the principal balance of the loans they service would decrease). Instead, the longer a property remains delinquent, the more money they earn.
But wait, how can they be making money when no payments are coming in? Because their servicing agreements state that they are entitled to be paid first out of any proceeds from the sale of the property. So, when the property is finally foreclosed, all of their fees (together with interest on any money they had to front) gets paid to them first, with anything left over going to the investors.
Chase’s program only underscores what many inside the industry have always known. If borrowers and investors could directly deal with each other to modify or allow a short sale, the real estate industry would recover much faster. However, it would mean that banks would not be able to make as much profit, so they do everything possible to keep the communication lines cut. [Bank of America, alone, reported a profit of $2 billion in the 2011 first quarter.]
Peter J. Pike is an attorney, working for a title company located in Orlando, Florida. He has spent the better part of the last four years assisting buyers and sellers of distressed real property, and is a frequent lecturer on the topics of short sales and foreclosures. Mr. Pike has been a practicing attorney for over 25 years, first in New York, where he was the founding partner of Pike & Pike, PC, a law firm in which he concentrated on real estate transactions and litigation. About 10 years ago, he moved to Destin, Florida, where he worked as in-house counsel for a local title agency. Mr. Pike can be reached at Peter.J.Pike@gmail.com.