I’ve been privvy to lots of talk about this new distressed homeowner law in Washington and how it affects our work as real estate agents. We’ve had a half dozen deals in our office in the past month that are either properties in foreclosure or properties that are being sold as short sales — where the lender is taking a big discount off what they’re owed (“owed” meaning all sums including principal, accrued interest, foreclosure costs to the trustee, etc) in exchange for getting cash now out of a presumably arms’s length sale.
As agonizing as it is for the sellers, and sometimes for buyers, these situations are always a lot more effort for the agents. And ironically it’s more effort with less pay — the lender often dictates that the commissions should be “X” which is sometimes far less that what has been contracted for in our listings. Instead of just communicating with the seller and the buyer’s agent, suddenly we’re in touch with the lender’s “loss mitigation” folks, escrow, maybe a bankruptcy trustee. You hear no whining here — we can choose not to take this work, as it’s a free market. But if our seller needs our help, it’s hard to say no.
And I wonder, from the bank’s position, how bad these “losses” really are? Sterling Savings, a local bank out of Spokane with which we do a lot of business, has a $2,000,000,000 construction loan portfolio. They’ve set aside about $150m in “loss reserves,” anticipating that when the dust all clears on this, that they’ll be out that much money in principal. And their stock has been POUNDED, to just a few dollars a share, with a market cap of $131m, down from $30/share last summer. They had income of $272m in 2007. It just doesn’t make sense to me that they’ll be hurt that badly, given their non-exposure to subprime and Alt-A loans, and this construction book — a large percentage of which is in the not-so-sick Puget Sound region.
As a real life example of a short sale: We’re working on a deal now where the bank is close to foreclosure, and we’re close to a closing. Sales price is around $400k (I’m changing the numbers a bit to obfuscate the deal). Lender’s principal balance is $365,000, but with interest and fees, the “payoff” would normally be $410,000. In last year’s market, this house sells for $465,000, bank gets all they’re owed, agents get paid, and seller gets a bit of cash at closing. But at today’s value, and a distressed sale at $400k, and after commissions/excise/escrow/title, there’s only $365,000 left over. So the bank agrees to a “short” which gets them 100% of their principal back.
I’ll bet they’ve written that loan down by 30%, or taken a loan loss reserve for $90,000 as they are so close to foreclosure on a loan that’s been non-performing for a year. That’s $90,000 against their current earnings. So at this closing, they get $365,000, their WHOLE PRINCIPAL. Do they book the $90k they’ve now “not lost” as income? I don’t know, but I would think so.
As the market unfreezes, and in one-two-three years, this logjam breaks up, it will be interesting to see if these banks’ loan loss reserves have been wildly conservative, resulting in huge windfalls on the balance sheets…or if they’ve been incredibly underestimated.
It depends on the bank, of course. But I think lots of smaller commercial banks, like Sterling, have been the baby thrown out with the bathwater.
To be continued…