A dear friend of mine is in the midst of short-selling one of her homes. An avid investor at the height of the market, she had purchased a major fixer in the best neighborhood in town, with the intent to live there for the rest of her life while she slowly remodeled the place.
As you know, the market turned. Her financial situation changed, and she decided that she wanted to do a short sale to someone who could afford to fix the foundation before its condition caused a major crisis — the problem is something she’s been working on for nearly a year at this point.
She’s had multiple offers to buy the place, and is currently in a holding pattern, waiting for the bank’s evaluation of the most recent of these offers.
She moved out long ago and, despite the fact that she loves this place, has long been resigned to losing it — whether through the short sale or a foreclosure.
Recently, her agent contacted her and said, "Look, the bank doesn’t seem like they want to take the offer." The place needs so much work, and has some unusual restrictions against expanding it at all, so unless a buyer gets it for a bargain basement price, buying it and putting in a new foundation, new roof and everything else just doesn’t pencil out.
"But," the agent continued, "the bank also doesn’t want the house back, because of its condition and all the city restrictions. You could end up in a kind of limbo on the place."
My friend is taking this opportunity, now that the bank seems to understand the condition issues, to revisit the issue of a loan modification with the bank. But the fact is, if she did end up in a limbo with the bank, she certainly wouldn’t be the only real estate consumer in limbo on today’s market.
Millions of buyers and sellers are stuck in short-sale limbo, that purgatory of weeks (best-case scenario) or many, many months (worst case) after the short-sale package goes to the bank’s loss mitigation negotiators, but before they sign off on the short sale’s terms.
Many millions of homeowners are caught up in loan-mod limbo, the fear-filled black hole of stomach-churning waiting for the bank to decide whether to modify your mortgage terms (e.g., fixing an adjustable-rate loan) and/or payments.
For homeowners who are behind on their payments — as many banks require borrowers to be in order to even have a real chance at a successful modification — loan-mod limbo essentially equals waiting for the bank to decide whether they can keep their home.
And you might have heard of the so-called shadow inventory of homes that are bank-owned, or soon to be, but are not on the market for resale. But you may not be as aware of the class of homeowners who live in this shadow — people like my friend, whose homes are subject to foreclosure, but are simply not being foreclosed on because the banks just don’t want them.
Many have not made a payment in months, and are anxious for closure, but have homes in such poor condition or located in such foreclosure-riddled areas that the bank is just not taking it back — and there’s no end to the stalemate in sight.
The delinquent mortgage payments, homeowners association dues and property taxes keep on racking up against the homeowner, and the bank just stands by — indefinitely. This might, in fact, be the worst limbo of all.
Keeping people in limbo seems to me a massive misstep on the part of the banks. There is a core tenet of negotiations that says that the party who has the least sense of urgency usually wins.
The banks seem to be taking the position that because the homeowner probably does have a greater sense of urgency, these delays might cause them to be unsettled (of course, I just committed the very fallacy I so frequently warn against, of anthropomorphizing financial institutions, ascribing to them human emotions and logic, of which they appear inherently incapable). …CONTINUED
The problem is that it fails to take into consideration one elemental truth about human nature: Humans cannot long tolerate uncertainty. This is why closure has such a universal value. Contrary to the banks’ apparent belief, most people would actually rather have the psychological and financial closure of knowing that they were going to lose their home — and have the ability to plan for their next home and know when they’ll need to move out — rather than sit through a year or more of sleepless nights.
Most people would rather endure a foreclosure, as excruciating as it is, and begin the era of healing their wounded spirit and balance sheet and get that credit-repair clock a’ticking, than spend 18 months knowing they have a 25 percent chance that they’ll get a modification.
The tipping points for many folks — the items that cause them to elect to walk away, when there’s still a chance of saving their home or, for short-sale buyers, getting their dream home at a song — are many.
First off, there are those homeowners who’ve been in an interminable loan-mod limbo who hear about some modified loans that don’t get any more affordable on a monthly basis than the original loans. Second, they read headlines about their bank’s principal reduction programs, but find the loss mitigation negotiator at a loss for words when asked about such programs — which may also push them closer to walking away.
Short-sale sellers are highly susceptible to walk away — they have no attachment to the home anymore, and are having to find a new place anyway, so waiting and wading through the bizarrely long cycle of repeated requests for documents they’ve already turned in — repeatedly — has very little upside for them.
And short-sale buyers are even more susceptible, especially when they come across an alternative home for which they need to move quickly on to ensure they get something.
And the longer any buyer, seller or owner is stuck in limbo, the greater the possibility of losing their home becomes a prospect with which they have come to terms. The more real the idea of (a) no longer having the home and (b) having to move to a new place becomes for people, the more likely they are to walk away.
The home is not only devalued economically, but also loses any psychological value it had. This is especially so for those in loan-mod limbo who fear that they may not be able to credit-qualify to lease a new home for their family if they wait for the delinquent payments and/or a foreclosure to do any more damage to their credit.
These limbos are counterproductive for everyone. We’ll be seeing the residual impact of these prolonged states of intense distress on the psyche and economy-shrinking tight-fistedness of Americans for decades to come, maybe longer.
Even when a loan-mod applicant makes it past the limbo and obtains a modification, often the devaluation of the home has been so thorough that they are highly likely to redefault on even the modified mortgage and walk away as soon as the going gets tough.
Hence, we see redefault rates upwards of 50 percent for those who do get their mortgages modified. We also see many a would-be short sale turn into a foreclosure when disgusted buyers fall out to go buy something else, some think due to banks’ preference to collect on mortgage insurance rather than mitigate their losses through short sales.
Lots of lip service has been given to streamlining these processes. Realizing these promises — that is, making them real, would salvage billions of dollars in real estate assets and consumer confidence.