LIVONIA, Michigan (Reuters) - Realtors in many U.S. states say lenders are demanding excessively high prices before allowing distressed borrowers to offload their homes in “short sales,” making the housing crisis worse.
In a short sale, a borrower dumps the home at below-market value and the bank forgives the rest of the debt. The borrower’s credit rating is hurt but for less time than in a foreclosure. Such sales have been touted by banks as a way out for homeowners unable to pay their mortgages.
But Realtors complain many lenders harm their own interests by refusing to accept bids below internal targets, even though that may eventually force lenders to sell homes in foreclosure, where bids are usually far lower.
In addition, many lenders simply do not have the people or processes in place to handle a swelling tide of short sales around the country, Realtors say. As a result, lenders are taking far too long to evaluate offers, leading many would-be buyers to walk away from deals.
“The system is broken,” said Ron Rosen, a Realtor in Lighthouse Point, Florida. “The only question banks should ask is can they make more in a short sale than in foreclosure.”
“The answer is that in nine out of 10 cases they will lose more money in a foreclosure,” Rosen aid. “But some banks seem to be asking a different question.”
On Tuesday the National Association of Realtors cited the slow pace of short sales in reporting a 2 percent drop in sales of previously owned U.S. homes last month as inventories swelled and prices slid.
“This has been a frustration of our members,” said NAR chief economist Lawrence Yun. “Lenders have been dragging their feet.”
Borrowers like Judie Quinn echo that, saying their lenders have been uncooperative and have passed up solid offers.
Quinn, 67, is a steel industry sales representative whose home in the Detroit suburb of Belleville had been on sale since August 2005. After back surgery in 2007 left her with large medical bills and out of work for two months, she decided she could not afford the $2,200 monthly mortgage payment.
“I wanted to save my credit rating, so I tried to arrange a short sale,” Quinn said at the Livonia, Michigan, office of Linda McGonagle, a Realtor at Quality GMAC Real Estate.
The loan was from Wells Fargo & Co (WFC.N) and serviced through an affiliate, America’s Servicing Co.
Between April and October 2007, Quinn received four offers, McGonagle said. The first offer of $289,900 — the asking price was $299,000 — was rejected by the lender because Quinn was not yet in loan default. “No one at the bank mentioned she had to be in default until after that offer was rejected,” she said.
She said the lender ignored the third and best offer of $299,000 long after the bidder had given up. The home went into foreclosure in October.
“The lender was unresponsive and unhelpful, so Judie wasted time and money trying to do the right thing,” McGonagle said. “I tell other agents to avoid short sales because you just can’t win. This is a commission-based business and if you can’t get deals done, you don’t get paid,” she added.
Wells Fargo said in an email that customer confidentiality prevented it from discussing Quinn’s case but said it had seen an increase in short-sale requests from borrowers.
“Lenders have pre-established guidelines from investors that we must follow when doing a short sale, and this includes the minimum amount an investor (or) mortgage insurer... will accept,” the bank said.
Gary Reggish, a Realtor at Remerica United in Novi, Michigan, said most of the owners he has worked with on short sales have been kept waiting months for word from their lender, which had caused many deals to fall through.
“Some banks are simply overwhelmed,” he said. “But they need to fix the short-sale process and start closing deals faster, which would cut inventory levels and push prices up. If it isn’t fixed, it will cost the banks a lot of money.”
Some Realtors said banks have an inflated view of what they can expect when home values in many areas have fallen sharply.
“Some lenders harbor unrealistic expectations of what they can get in a down market,” said Van Johnson, president of the Georgia Association of Realtors.
He said widespread use by lenders of “broker price opinions” — quick, inexpensive online property assessment — resulted in only a “simple best guess.”
Andrea Gellar, a Realtor at Sudler Sotheby’s in Chicago, said property appraisals there are fair because “appraisers are being called on the carpet to be accurate” after years of inflated evaluations during the property boom.
But Gellar added that in Chicago the length of time it takes a lender to respond to an offer is the real problem.
“It can take several months to get approval on a short sale and few buyers will wait that long,” she said.
Editing by Peter Bohan and Frank McGurty