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Worried Banks More Willing to Negotiate Mortgages

Jul. 15, 2008
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Worried Banks More Willing to Negotiate Mortgages

  A surge in foreclosures is forcing more and more lenders to take a loss on bad loans, giving rise to a speculative real estate practice known as a “short sale.”

  Here’s how it works: When a homeowner is threatened with foreclosure, an investor negotiates with the lender to buy the mortgage for far less than is owed.

  If all goes well, the sellers reduce their debt, the buyer gets a good deal and the bank removes a non-producing asset from its books. But, in practice, the deals are notoriously difficult to piece together and too often are oversold as a way to turn a fast buck.

  Despite the caveats, short sales, virtually unheard of only a few years ago, are suddenly hot. A recent search of “short sale” in the Milwaukee Multiple Listing Service turned up 173 properties. Milwaukee Craig’s List shows 47 “short sale” posts, many with multiple properties for sale.

  Some listings trace back to investors who are betting that they have negotiated a loan buyout that’s low enough to assure a quick sale and profit. Some are honest attempts by real estate agents to help a client avoid foreclosure. The Greater Milwaukee Realtors Association recently sponsored a short sale seminar to help Realtors identify short sale opportunities and to become familiar with paperwork and protocol.

  Why now? An avalanche of repossessed and abandoned properties has forced banks to swallow their losses and walk away. RealtyTrac, an online market for foreclosure properties, reports that June foreclosures are up 53%, and that bank seizures tripled, compared to June of last year. This news follows a 75% increase in total foreclosure filings nationwide from 2006 to 2007. Wisconsin is faring better than many states, ranking 29th in foreclosures, but the market is still grim.

  “Lenders are definitely more willing to talk about short sales than they used to be,” said Dave Price, a Milwaukee real estate broker. “It used to be that I’d have to leave messages and mail letters and send faxes for a bank to get back to me.”

  Banks need to quantify their loan losses, Price said, something that is impossible when a huge chunk of a loan portfolio is tied up in seized property. “Investors get nervous when a bank can’t say for sure how much money it has lost,” Price added. “So getting these properties off the books, even at a loss, actually helps the lenders in that regard.”

  The uptick in short sales has another downside—more properties dumped on the market when prices are already low.

  “I think it’s a hard way to make money, and it just depresses prices,” Price noted.

  He said short sales are starting to show in the condo market, a particularly troubling sign.

  “Condo owners generally have higher incomes than the homeowners who are getting into trouble with their mortgages,” he said.

  Dave Sayas, a Wauwatosa real estate attorney, said short sales are over-hyped and difficult to put together. Banks don’t move quickly, and most buyers want to move in right away. In a short sale, you can easily wait 90 days just to hear if the bank approves. Foreclosures can also be complicated by the number of liens against a property—and not all lenders may want to settle.

  “You see these guys on 2 a.m. infomercials, telling us we can get rich quick doing short sales,” Sayas said. “But you have to ask yourself, ‘Why is this guy hawking his tapes and books and not out doing it?’”

Brewery Credit Union: Bringing BEER to Work

  The Brewery Credit Union (BCU) has more on tap than just savings accounts and car loans. The community not-for-profit organization also offers BEER, or Brewery Employees Education Resource programs.

  “We always strive to educate,” said Marketing Director Mikal Gilliat, who noted that BCU’s seminars for first-time home buyers regularly draw 20 or more participants. “In this kind of economy, more people have questions about their finances. We explain things like credit scores, investing and how to manage money.”

  BCU also offers payday loans at rates far below the competition, where interest can be as high as 90%.

  “We saw too many members being taken advantage of by payday lenders,” Gilliat said. “Those places avoid posting the APR [annual percentage rate], and just tell the public they are charging ‘X’ amount for $50 borrowed. We are upfront and charge far less.”

  The credit union is open to the public, but offers special rates and programs to member organizations. Gilliat said that Time Warner employees will join BCU in September.

  The credit union recently began offering mortgages.

  “One customer said he had been trying to buy a house for 10 years, but was always turned down because his credit score was too low,” Gilliat said. “Our mortgage specialist sat down with him, and in five minutes figured out there were three huge errors on his credit report.”

  Several months later, the customer closed a deal on a new home.

Squandering the Stimulus

  How did you spend your stimulus check? If you’re like most Americans, you bought gasoline.

  Since President Bush signed the tax rebate into law Feb. 13, the average household has spent $1,500 filling the family car, according to research by Wisconsin Public Interest Research Group (WISPIRG).

  According to the analysis, since February the average cost for gasoline per household has gone from just more than $60 weekly to almost $100 per week.

  “If Congress wants to do something long-term about high gas prices, it will give people more alternatives to driving,” said Hailey Witt, WISPIRG campaign coordinator, in a statement. “Unless we make it easier to drive less, Wisconsin families will be stuck in neutral as they spend more and more at the pump.”


  Credit crunch: When banks suddenly stop lending, or bond market liquidity evaporates, usually because creditors have become extremely risk averse. (Source: economist.com.)

Watch This Space

 The next New Economy column will appear in the July 31 issue of the Shepherd.


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