The Third misconception to short sales is that the bank would never accept (for example) $40,000 on a loan of $100,000. First, let me tell you, NEVER SAY NEVER. People generally believe that the banks care a lot more about loss then they actually do. It all depends on the situation and how you set up the sale and structure the hardship.
Now wait a second because I don’t want you to misinterpret me, Banks do care about a severe loss a lot. Think about this, a $40,000 recovery on a loan that was $100,000 is a loss of 60%, that isn’t something that a bank is willing to just let roll off their shoulders.
If a bank puts $100,000 up originally for the mortgage, there is no chance they are going to walk away with only 40% of their money without checking into it. The bank employees who set up your loan and the ones that answer your phone calls are subordinate level employees, and they are not going to have the clearance to approve a loss of that significance. Honestly, it is a good thing that the employees that you normally deal with are not the ones with the final okay or denial of the loss. Though they are the people that you will have to go through (or maybe around would be a better term) in order to get your file to the Associate Vice President (AVP), who one understands math, and can make the final decision on your file, and to who mitigates the situation, or makes the loss seem less severe than the loss that could have happened if the offer is not taken.
If you can convince the AVP that the offer that is reasonable and/or reflects the current market value, then the bank may accept a severe loss, even one as high as 60%. There are and has been many cases where the banks have accepted a significant loss, even one of that severity.
The severity of a loss that a bank would be willing to accept, again depends on the situation and how well you present the hardship and file. Okay, now let’s consider a property that now has a fair market value of $55,000, though the people that own the house still owe $109,000. No matter which way we or the bank looks at it, they are going to be out a very large portion of the money originally invested. In a case such as this, there’s a large chance that the bank would agree to an offer of $50,000 to avoid the hassle and uncertainty of letting the house go into foreclosure and having to resell it as B Owned Real Estate (REO). In this case even trying to sell the property as an REO, the lender would still not satisfy the lien originally placed on the property.
First-position liens, which is a claim against a property that will be the first claim to be repaid if the property owner would declare bankruptcy or default on the loan, rarely sees a loss as high as 50%. However, it definitely does happen at times. Though a severe loss of 99% is not uncommon in second-position or other junior liens.
Contact me on more information about how to package your file and hardship accurately and present the numbers. to the AVP.