Or, Why the foreclosure problem is worse than it should be.

Turning the economy around from a recession usually starts with the housing market. A home purchase is the start of a myriad of financial transactions which all help to revive the economy. Everything from new construction and contracting work, mortgage loan origination, title and closings, home furniture and equipments purchases, lawn and garden purchase, etc. So, with the number of foreclosures at record highs you’d think that the banks and institutions that own (or, in the case of short sales, may soon own) billions of dollars in residential properties would want to keep the nation’s largest sales force happy in not just their own interest, but the interests of the overall economy. But from my own experience, that just doesn’t seem to be the case.

Short sales are ridiculously hard to fathom. These are cases where home owners are trying their level best to work out something with their mortgage lender to avoid foreclosure by selling at whatever price the market will bear, even it means that they don’t have enough left over from the sale to pay off the mortgage and closing costs. You would think that these conscientious souls would be rewarded for not doing what thousands of other home owners have already done by just walking away and leaving the bank holding the bag. But in case after case, you’ll hear from agents and home owners that the process is made just so difficult and/or the steps required so arduous by the lenders that most either aren’t willing to keep trying or run out of time before they can work out a purchase transaction with a potential buyer. In California, half of attempts to get borrowers out of underwater homes fail.

The same hurdles hold true for working with foreclosure properties. In a recent transaction I was involved in, a young couple chose to make an offer on a FANNIE MAE foreclosure listing that had been on the market since summer of 2010 (and presumably longer since the owner probably tried to sell it themselves for a time before it fell into foreclosure). The price had been dropped to below the assessed value (which not too long ago in our market used to be an anomaly). After some delay in presenting the offer by the listing agent, (probably due to the fact that foreclosure listing agents are overwhelmed by the amount and quantity of the work required to list foreclosures in the current market), a ‘tentative’ counter-offer was received from FANNIE MAE. I say ‘tentative’ because whenever you deal with a REO (real estate owned by bank or institution) property, you never really have a deal until senior management signs off on the contract. In fact, here’s the exact statement I received during negotiations:

Please be advised that your client’s acceptance of this offer is not an accepted contract. *** Final acceptance of the contract must come from the seller’s senior management staff.***

This is counter to what most real estate agents are used to dealing with. In a typical individual to individual transaction, each counter-offer is signed before being sent to the other party. That way, you know that you have a done deal and not just a possible scenario. Seasoned agents know the risks of verbal counter-offers in a business where the only thing that matters is a written and signed contract. So, finally, an agreement was made, (in principal) between the parties. Even though their agent had warned them not to count their chickens until we had a signed contract in hand, the young people at this point, as young people do, excitedly tell their family and friends that they have just bought a house.

Well, of course, the dreaded (and apparently par for the course) next communication from FANNIE MAE’s representative is the ‘multiple offers form’ (i.e. other offers have been received prior to senior management’s signing off on your agreed upon purchase offer) and your purchasers now have 24 hours to make a decision on whether to 1) raise your offer 2) keep your same offer or 3) rescind your offer in what’s known as the ‘highest and best’ bid period.

Of course, the young couple are disappointed. They are, as most young couples with a newborn, not only at their maximum mortgage limits, but already concerned about making a payment that’s more than their current rental payment. There’s also that lingering feeling that this is just a ploy to get them to raise their offer. After much soul searching, parental advice, and tears, the young couple decide not to move forward with the purchase and rescind their offer.

What happens next if even more frustrating from an agent’s perspective. What had been up to that point a fairly lackadaisical response time from the listing agent, soon became a frantic attempt to contact me regarding the offer. Two phone calls in quick succession followed by another email on the day after the offer was withdrawn. Another day passes and then another communication from the listing agent: “If we can get approval today are the buyers still interested?” Later that day: “FYI – offer is now approved and we can move forward”. Apparently, the other buyers had mysteriously disappeared.

I know both from my own 27 years of experience working with foreclosure listings and from talking to other agents, that this isn’t an unusual occurence. Many agents I know won’t even deal with foreclosure and short sale properties because of the hassles. They warn buyers that “the road’s too long and there may not be a home at the end of the road”. That’s tough talk from a commission-only based pay workforce that’s used to doing a lot of work and not getting paid. Even if it’s a small percentage of Realtors® who don’t want to help sell foreclosures and short sales, that’s a huge problem for the institutions saddled with 3.8 million properties in 2010 alone (a number that’s expected to rise even further in 2011).

I, for one, can’t help but think the process could be streamlined. Banks, mortgage lenders and other REO institutions need to understand the process from the home owners, buyers and real estate agents perspective better if we’re ever going to turn the housing market (and the economy) around. Anybody listening?