The pains of loan defaults and when will it end?

That banks were ill-prepared to handle the sudden onslaught of loan defaults and foreclosures is an understatement. The combination of panicked homeowners, lack of a standardized process, short-staffed loss mitigation departments, inexperienced real estate agents and falling home values resulted in chaos during 2008.

“There was no curve—it was a big boom,” said an agent, who was with Countrywide in the early 1990s. “But back then it wasn’t 400 one month and 4,000 the next, as it was this time.”

“Did we have some growing pains? Certainly,” admits David Knight, vice president of Default and Retention Operations for Wells Fargo Home Mortgage. “Last year at this time, as an industry, we were still grappling with having enough people to answer phones and enough negotiators to respond to offers.”

Some banks and lenders now has the processes and people in place to more effectively manage troubled loans via a streamlined short sales process and by spelling out qualifications and expectations for agents certified to handle sales of REO assets.

The key is establishing direct communication between the agent, homeowner, and negotiator within eight days of receiving an application, quickly performing a property valuation, and identifying mortgage insurance or other issues, such as liens—before any offers from buyers are entertained. However, not all banks are as efficient as they could be because they are overwhelmed with the volume.

Short Sales: What’s Changed

With federal and state governments and regulators increasingly calling the shots, banks are scouring their portfolios looking for borrowers in trouble or on the verge of it. The hope for 2009 is that lower interest rates will allow many homeowners to refinance or negotiate a loan modification. Failing that, a short sale becomes an option.

The popularity of short sales has grown because, in certain cases, a seller no longer is liable for paying taxes on the difference between the amount owed on the loan and the short sale price.

“Historically, people ran from a short sale, because there was a taxable consequence,” says Ronald Bergum, chief production officer with Irvine-based Prospect Mortgage and formerly a top executive at IndyMac.

Short sales are a cheaper option than foreclosing on a property and selling it as an REO. “We save 10 to 15 percent in loss mitigation [costs] by doing a short sale,” says Bergum. “It’s a win-win for everybody. The issue lenders have with short sales is an understanding of what the real value of the property is. If the lender doesn’t have confidence that the valuation is real, a short sale is probably going to fail.”

That many troubled loans are owned by multiple institutions further muddies negotiations, lengthens the process, and causes buyers (and agents) to lose interest.

Managing Your Assets (and the Bank’s Asset Manager)

Everyone’s goal is to stem the tide of foreclosures, yet no one is sure what combination of bailouts, efforts to stimulate lending, foreclosure holidays, and state legislation will do the trick.

But when a loan can’t be refinanced or modified, or the property sold via short sale, the bank usually ends up foreclosing. While short sales can take months to negotiate, banks are anxious to move their REO properties and willing to hire qualified agents to do so.

Experts say selling REOs is all about managing assets—yours and the bank’s. Asset managers handle between 150 and 250 cases at a time and may close 40 to 50 properties a month, according to Jeffers-Volk, a former president of a REO industry trade group. “It’s kind of like playing three-dimensional chess,” she says.

“Lenders do not have time to train you, which is why we decided to train agents,” she explains. “Each lender has different procedures, and it is very important that you know your client’s procedures.”

REALTORS® also may have to train their bank asset manager, who may or may not have real estate sales experience.

“The number one thing an REO agent needs to recognize is that you can’t assume the guy [asset manager] back in the Midwest knows the specifics of how agents in California or Arizona write contracts.

And everyone needs to keep a close eye on legislative changes and the client’s evolving financial situation.

More…

The Differences Between a Short Sale and a Foreclosure

Common Short Sale and Foreclosure Questions

The Basics of a Short Sale

Making an Offer on a Short Sale

Short Sale Myths

Short Sale vs Foreclosure

What is a Short Sale and Do You Qualify?

Short Sales – 7 Legal Pitfalls

Short Sales – 10 Questions to Talk Over with Your Attorney

Short Sales 2009