Short sales don’t need another stumbling block. However, an increasing number of short sales are being derailed when banks sell their servicing rights.
A loan’s servicing rights are either retained by the bank that originated the loan or sold to a third party. These third parties are often smaller mortgage companies or bond market pools on Wall Street. One of the main reasons big banks transfer servicing rights is to shed the costs of servicing a delinquent loan. Thus, loans in the short sale process are prime candidates for transfer to a smaller servicer.
What does this mean for those involved in short sale negotiations? A servicer change mid-stream can add weeks or more to the short sale process. Ultimately, these eleventh-hour switches cause deals to expire as buyers lose patience and look for an easier purchase.
Especially at risk are distressed sellers who have a cash incentive riding on the completion of a short sale. If the short sale falls apart for any reason, this cash incentive is lost and the seller is out of luck. Even if the short sale is eventually completed, the new servicers often do not honor the incentive.
first tuesday insight
Mortgage servicing, deceptively simple, is fraught with controversy. Mortgage giant Fannie Mae spent $1.5 billion from 2008-2011 purchasing servicing rights from Bank of America and 12 other major lenders. However, Fannie spent more than legally required to guarantee the banks would go for the deal.
What’s more, Fannie Mae doesn’t service loans. They were outbidding smaller companies, for an asset they intended to sell to those same companies. This was touted as a method of ensuring a smooth transition of servicing rights, making sure that the difficult loans were wiped of the books of the big banks.
However, servicing rights are an asset that can be sold on the private market. If the banks needed to unload these rights, they had the ability to lower the prices of their assets. But, a government sponsored entity stepped in instead, purchasing these poisoned assets that the lenders couldn’t get rid of themselves, and for rates nobody else would pay. In the end, this was nothing more than another government bailout, but one that went unnoticed due to the obscurity of this lending practice. What can be done? Elected officials that hold Fannie accountable to Main Street is a start.
first tuesday readers take note! If you’re negotiating a short sale on behalf of your client, keep tabs on the mortgage servicer via contact with the lender. Know your contingencies and close the deal!
RE: “Another hurdle for short sales” from the San Diego Union – Tribune