Real Estate News

I have been involved in many conversations recently with Realtors and others about the failure of many homeowners to take responsibility for the debt they have incurred during prior years of “go-go” credit. These conversations have encompassed not only mortgage loan debt but credit card debt as well.

I attended a seminar last week at which a self proclaimed bankruptcy expert encouraged people to engage his law firm to renegotiate all their debt, not on the basis of personal financial need or crisis, but because, in his view, bankruptcy is now a socially acceptable way to avoid repayment of legitimate debt. Debtors, in his words, would be foolish to continue to pay down debt from which they could walk away via bankruptcy or foreclosure.

In contrast to that extremely irresponsible position, I have also heard more than one Realtor state that they will not participate in the short sale process because they believe that it is morally wrong for anyone to walk away from their personal financial responsibilities, regardless of the circumstances.

As with most emotionally charged issues, these two extreme viewpoints should be tempered with logic and a look at the big picture. Each individual must deal with his own sense of what is morally right and wrong, but there is no question that mass adoption of the concept that to walk away from one’s debts is not only OK, but socially acceptable as well, would create an even worse financial crisis than the one we have now.

What some of the proponents of “easy debt eradication” overlook is that each time a new law or government program makes it easier for debtors to walk away, such programs also create a disincentive for banks to lend, and the credit markets further tighten. These programs, if abused or overused, also result in the continued devaluation of everyone’s assets.

On the other hand, the short sale process and debt re-structuring programs are absolutely necessary to stabilize the financial and housing markets. Without them, the backlog of housing inventory would continue to grow and the economy would continue to decline. Used properly, these programs can contribute to the overall good and hasten economic recovery.

This issue brings to mind the old Chinese proverb which advises, “Moderation in all things.” As always, common sense and a reasonable perspective on personal responsibility should be engaged.

Historically, mortgage holders have acted fairly consistently when bidding on their own properties under the foreclosure process. They have typically bid the amount of the unpaid mortgage loan balance at the sheriff’s sale.

Recently we have seen a trend whereby lenders are bidding substantially less than the outstanding loan balance. In many cases, the bids are 20-25% less than actual current market value, which could be as much as 50-60% less than the loan balance.

I will not speculate as to the reasons for this change in strategy, but there are at least two significant implications that are created as a result. First, unlike the former practice where the foreclosure bid is placed at the full amount of the loan balance and, therefore, satisfies the debt, the practice of bidding less than the loan balance creates a deficiency liability for the property owner. This deficiency liability can be pursued against the mortgagor for six years following the foreclosure.

The second implication of this strategy is that the reduced bid establishes a lower redemption amount for the property owner. In cases where the redemption amount is less than property’s current market value, the opportunity for a “pre-approved short sale” is created. Responsive property owners can become highly motivated sellers in these situations with the opportunity to capture and retain the difference between the reduced redemption amount and property’s current market value.

As previously mentioned, homeowners in this situation may be pursued later by their lender for the deficiency, but the lender’s decision to do so will most likely occur without regard to the homeowner’s ability to sell the property at a “gain” during the redemption period. In fact, a case could be made that the homeowner mitigates their net deficiency liability by maximizing a market value sale under their control as opposed to letting the property revert to the lender and be subsequently sold for much less on a distressed basis.

Weir Manuel sales professionals are encouraged to be vigilant for these opportunities on behalf of their clients and provide them with the trusted advice needed to guide our buyers and sellers through this market.