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I got a chance to watch a couple of agents go at it with each other in a real estate forum trying to answer a question about doing short sales.   It was interesting, to say the least.  Besides the two main agents who proclaimed themselves the “experts” and hijacked the conversation, there were a few others who chimed in and made some comments.  But the question was never specifically answered.

The question posed was whether a lender will approve a short sale if the borrower had assets. He didn’t provide a lot of detail but wanted to either do a short sale or let his home go into foreclosure and he specifically asked not to get into a debate about the ethics in not paying his mortgage.    

The argument or “discussion” in the forum quickly evolved into a big debate about the ethics of what people considered to be strategic default.  One expert proclaimed it was morally and ethically wrong to engage in strategic default and the lenders would not go for it.  The other expert proclaimed morality and ethics had nothing to do with his decision and it was more about money.

As a San Jose Short Sale Agent, I tend to agree with the latter expert.  When you are dealing with short sales with lenders, the department you deal with is called Loss Mitigation.  Let me say it again:  Loss Mitigation.  Their job description is patently obvious: it is to mitigate or lessen the loss for the lenders. 

Yes, there obviously are moral and ethical implications of not paying your mortgage when you have the financial ability to do so.   I firmly believe you should pay when you can and live up to your contractual obligations.  However, the question posed specifically asked not to judge the ethical implications but sought opinion as to whether a lender would agree to a short sale when the borrower stopped paying and was headed towards foreclosure.   

There is no definite yes or no answer in these matters as the answer lies in the details.  It has a lot to do with how much assets the borrower has or does not have.  However, if the lender is faced between foreclosure and short sale, from my experience, the loss mitigation department chooses short sales over foreclosures.   At the end of the day, the primary decision will be about which method loses less money for the lenders, then, other factors like ethics and mortality can be entertained. 

Why do you think big lenders like Chase and Wells Fargo are offering people up to $35,000 to do a short sale without even verifying their financial information?   HAFA recently amended its rules to state that servicers are no longer required to verify any financial information, but only to collect signed hardship letters.  Do these actions by large lenders and servicers sound like they are overly concerned about the ethical or moral issues surrounding foreclosures?   

I can’t speak for other States, but in California, the recent changes in the law means if the lenders agree to permit a short sale, then the issues about deficiencies become null and void.  Once a short sale has been approved, the seller can walk away clean without looking over their shoulders.  Yet, another procedure that make completing a short sale more effective and efficient and preferable to foreclosure.  It’s all about money; if the institutions can make more money foreclosing, they will certainly choose that method, but everything recently is geared towards choosing short sales. Yes, the lenders hate strategic defaulters, but they hate losing money even more.    

So back to the question about would a lender approve a short sale if the borrower has assets?  It would depend on how much assets the borrower had and whether foreclosure would yield more money for the lender or a short sale. 

I got an offer in January from an out of area Realtor on a duplex I had listed as a short sale.  I thought this was kinda strange they never saw the property that I knew of.  I figured maybe they where related to a tenant.

The beginning of April we had gotten approval. With no deficiency to sellers.  My seller had been difficult to deal with from the beginning, getting info to submit price changes, signing the offer, ect.

The buyer/Realtor told me she was new to all this and she was very confused.  She had been licensed since 2007 and I'm guessing not doing much in Real Estate.  I asked if they would be doing an inspection of the property.

The week before closing I was still trying to get the lease agreements from the seller.  During that time I had sent the buyer/Realtor an arms length affidavit. Two days later I was told the deal was off buyer/Realtor decided not to continue with the purchase.  By this time I had been pulling my hair out of my head getting the seller to co-operate.  One unit had no lease just month to month, I thought this was the reason for buyer was not going forward. Seller also stated no rent was received for April there was no security deposit and no last months rents paid for the unit with no lease.

I sent the buyer an email asking if they would reconsider if the tenant would sign a lease agreement.  We then got notice they would close. So I asked if we where still on for inspections.  I understood the buyers husband would be present and the hired inspector.  The morning of inspections I spoke to the tenant to clarify he never paid Aprils rent, no security deposit and no last months pre paid he told me that was all untrue.  Oh did I mention the buyers never showed for the inspection.  I had the tenant write a statement of the facts. The other tenant made a comment that she thought the sellers mother was buying the place, my comment was I wasn't aware of that.

Meanwhile I thought these people where crazy this inspector has no clue of what be was doing. I had never met this guy so I thought he must have been from the area where the buyer/Realtor is from. Then again was that my business? The property was bringing in a 14% cap rate and I thought that's why they where wanting to purchase.  This was Friday morning closing was for Monday afternoon.

That day (Friday) I got a fax from the seller stating she was as frustrated as I was and didn't appreciate my petty comments and I had a fiduciary to her.  Note I'm a transaction broker.  I didn't understand the comment of petty remarks.  If begging and pledging to get the seller to co-operate is petty then OK.  At this point I took all my info and her fax and sent it to our lawyer who was doing the closing and said until I hear back from you I will not respond to this seller.

Monday morning I find out from the attorney that the buyer/Realtor is the sellers aunt, the inspector was the sellers step father (not a home inspector) and the step father was purchasing this also because they had formed an LLC, that they wanted us to change names at closing to this LLC.  The closing agent at this stage said she quits.  At this point I could careless if it didn't close I felt total deceived by the buyer and seller.  At this point there was no arms length affidavit from either party.  Gee I wonder why? 

The buyers husband shows up to closing acting as he knew nothing and brings a definition from some ask search, what the IRS claims is an arms length transaction is.  Mean while he has the arms length affidavit  with the signature of the Realtor on it. I take this and make a copy, then tell them I will NOT sign this.  Then they tell me that I knew this all along supposedly the seller had told me this in February.  If I had known do you honestly think I would have worked so hard to get no where? 

I feel this Realtor/Buyer has major ethic issues and I would like to go forward with an ethics complaint would you?