Wednesday, September 24, 2008

Sigh--Delays, Delays, Delays; Or, Working In "Bank-Time"

I haven't posted an update on the house hunt in several days--largely because there hasn't been anything to update.

A couple of weeks back, we found out that the bank has mostly agreed to our offer, but were negotiating with the mortgage insurance company. Now, I'd thought given what we knew about this home and its mortgage situation (having done courthouse research on that very topic) that there likely wasn't mortgage insurance involved; the owners were sub-prime borrowers, after all, and refinanced their 80-20 mortgages (both of them ARMs) into a single adjustable-rate mortgage a couple of years ago. Apparently, they financed at 100% (or more), and even though the bank in question (California's failed OwnIt Mortgage) wasn't known for asking for mortgage insurance because it so quickly sold every loan it originated, the owners ended up with PMI.

That throws a bit of a monkey-wrench into a short sale. Why? Well, if the bank were to foreclose, they'd collect on the mortgage insurance policy, which typically insures up to 17% of the loan's original principal. That could mean that the bank might get a better deal by foreclosing than they'd get with a short sale.

Depending on the policy, the mortgage insurer may have to cover a portion of the bank's loss even in the case of a short sale, not just for a foreclosure (this is a pretty common situation from what I understand). Thus, the mortgage insurer has to okay the terms of the short sale, too. And that's where we stand at present.

Now, to me the negotiations should be simple. The bank says to the mortgage insurer, "Look, we're going to either do this short sale or foreclose. You're paying one way or the other." I would assume the only point of negotiation from the insurer should be how much they're willing to pay; in other words, "Hey, bank, you're taking a smaller loss with this sale; how about we pay a proportionally smaller claim, too?" (Aside from this, the insurer can go after the owners and ask them to sign a promissory note for the insurer's loss in paying the bank's claim, or otherwise hold the owner financially responsible in some way--though a good bankruptcy attorney will deal with that unsecured promissory note in short order...)

So I don't get why we're still waiting, two weeks and counting, from when we learned the insurer was involved in negotiations. The math is simple; by my calculations, the bank is approximately $30,000 better-off taking our short sale offer than foreclosing--a figure which grows every day, mind you, as the uncertainties of the housing market drag down the value further; Zillow estimates for the value of the home have already fallen $4,000 in the time we've been waiting on a decision.

Worse for the bank is the fact that the sale has to satisfy the FHA; the FHA isn't going to approve our loan if they're paying more than the property is worth. And every day the bank delays lowers the chances the FHA will be able to approve the upper end of our offer. With falling prices, the bank not only increases the loss they'll face at foreclosure but increases the chance our offer will no longer be available to them.

But we're in "bank-time" now, a strange quick of quantum mechanics and special relativity which twists what should be a decision of hours and minutes into weeks and days. I dealt with "bank-time" in the sale of my townhome, where Wachovia spent days on end on an "emergency rush" loan twiddling their thumbs and not getting the appraisal scheduled, so I'm no stranger to the concept, unfortunately.

I'm not going to even go into what the troubles at insurer AIG along with the uncertain prospects of the Bush and Paulson bank welfare act ($700b - $1t of taxpayer money on a blank check--pay no attention to that man behind the curtain; look at the monkey!) might mean in terms of delaying our home purchase. I can only hope the bank (and its insurer) haven't said, "Hmm, let's suspend short sale approvals for the time being to see what we might get from Uncle's teat." They'd be fools to take the certain numbers of our offer and trade them for the uncertainties of some government bailout.

Of course, there's also the risk now that the joys of the collateralized debt obligation (CDO) world and their mortgage-backed securities will result in the sale, as part of a large group, of the loan to another bank altogether, meaning we'd get to start over.



John Nolley II said...

I wanted to expound for a moment on the math behind our short-sale offer, without revealing the actual parties involved.

From courthouse research, it's clear the sellers owe between $470k and $485k on the home.

County tax records (traditionally high) assess the home at $433k; the fair market value is closer to $375-$385k.

We've offered between $395k and $405k for the home.

It will cost the bank somewhere around $32k, total, to sell the home (this includes standard commissions for the agents plus seller-paid fees for deed prep, recording/transfer, etc.)

The insurer will cover somewhere around $80k of the bank's loss, either in foreclosure or short sale.

Thus, in selling the home to us, the bank will lose in the neighborhood of $30k--really, that's not much of a short sale at all.

In a foreclosure, the bank will spend up to around $5-10k to foreclose (VA is a trustee state; they basically just pay attorney's fees with no court costs--unless the owners declare bankruptcy, of course).

They then would have to sell the home, which would at best bring in $380k (as their BPO surely has told them). Foreclosures tend to sell below market value, too, making that $380k figure more a pipe dream than reality.

And they still have to pay commissions and other seller fees, on the order of $30k.

Thus, even if they sell the home immediately after foreclosing, they're going to lose $55-60k MINIMUM. That doesn't include any costs to them to keep the property on their books, pay property taxes, utilities, lawn maintenance, etc., while it sits and waits for a buyer.

Our deal is, at a minimum, $25k better than what they'd get at foreclosure. Split the difference with the insurer and they still come out way ahead.

I simply can't see what's responsible for the continued holdups.

John Nolley II said...

A few more thoughts: I've done some more research on mortgage insurance, and it seems that banks sometimes took out "hidden" insurance policies themselves.

Typically, mortgage insurance policies are required by lenders for people paying less than 20% down, but are paid directly by the borrower (with the lender as the beneficiary).

However, a lot of the subprime loans that were "100% LTV financed" or more and claimed to not have insurance in fact DID--just behind the scenes, so to speak. And the borrower still paid for it via a higher interest rate.

But that adds a wrinkle to our home purchase. I'd been a bit surprised the sellers' loan had mortgage insurance, as they obtained the loan at the peak of the subprime spree and appear to be subprime borrowers by all appearances. "Hidden" insurance could explain that!

I'm not sure it makes the negotiations with the insurer simpler or not. On one hand, they're less likely to go after the seller for the loss in paying the bank's claim; on the other, they may fight harder and investigate the policy more closely.