Bank incompetence seen through the eyes of a real estate professional.
I always wondered about dimwits who go on holiday, then spend the entire trip a fingerbreadth from the hotel television. But there I was--fingers, breath and all--in my beachside room screaming at Nancy Pelosi and Henry Paulson on “All Bailout, All the Time” TV as they ran around like Chicken Little telling Americans that money no longer grows on trees and that the great oaks we call banks would perish if they didn’t get some greenbacks fast. The green was then plucked from our modest front yard flora and rushed to the banks, but the banks then stubbornly refused to shelter us with their pythonic branches.
Even though I was an anti-bailout girl from day one, I figured it would have been better to give the money to Americans indirectly rather than rely on the Troubled Asset Relief Program (TARP) and other questionable congressional schemes. Of the $4 trillion that has been committed to the bailout (according to figures released by Congress’ oversight panel, although Bloomberg and others say it is upwards of $12 trillion), the 250 million Americans age 18 and over could have received $16,000 each. It would work like this. A person with a mortgage would receive a principal reduction of $16,000 on his bank loan. A person without a mortgage, but with credit card debt, would receive up to a $16,000 credit on this debt and any unused funds would be placed in a mutual fund for a period of no less than ten years. A person without mortgage or credit card debt would be required to take the $16,000 mutual fund option. The banks would receive the money, thus become more liquid so they could lend in the future. The stock market would get a boost, and the average person would experience greater optimism about the economy and his own financial situation. This did not happen, and it is fruitless to cry over bare bushes and toppled trees, or the verdant landscape that could have been.
Anger, however, can often move mountains, even barren ones. The average person is incensed over pyramid-king Bernie Madoff, CEO bonuses, lavish executive junkets and the diamond-studded safety nets gifted big business. This anger has prompted a lot of legal scrutiny and a few arrests, a lot of indignant political speeches and a few attempts to patch bad law, and a lot of negative press about corporate greed and a few reimbursements of bonus funds.
But public outrage is deficient in the realm I call banking’s black hole of incompetence, a bureaucratic void which seems to suck intelligence, ability and reason from bank employees. As a Realtor, I have come face to face with this stymieing scenario in bank short sale departments.
A short sale is when a lender agrees to let a property sell for less than is owed on the loan and forgives the difference in order to avoid a costly and time-consuming foreclosure. This is not real forgiveness or a favor; it is done to increase the bank’s bottom line. A short sale tends to net the bank more than a foreclosure does.
A short sale works like this. A property is listed with a Realtor, and then offers are submitted to the bank along with documentation showing the owner of the property has a hardship. The bank reviews the documents and appraises the property, then typically two to three months later, makes a decision about whether they will take less than the amount due on the note. According to the Philadelphia Inquirer, buyers are sometimes required to wait six to 11 months for a short sale department’s response, finding out later they have chased their tail and have no deal at all.
Short sales have increased dramatically in the past two years. According to the National Association of Realtors, short sales and foreclosures account for 45 percent of the home sales nationwide.
I recently closed six short sale escrows, but grimaced each time as banks delayed for months, ordered overvalued appraisals and mismanaged files. Too few employees and low wages was the standard excuse, but there did not seem to be an attempt to increase compensation or hire enough staff to handle the workload.
On these transactions, the banks—which were supplemented with taxpayer dollars--lost $675,000, an average of $112,500 per property, in a price range of $500,000 to $1,100,000. The losses could primarily be attributed to the bank’s extended delay, which typically resulted in a loss of the buyer with the best offer. In the end, a second or even third place bidder would close the deal. Additionally, when banks are slow to respond, properties fall into disrepair and lose value. Brown lawns, mosquito-infested pools and leaky plumbing systems are not uncommon.
Sometimes this taxpayer loss can be chalked up to inflated bank appraisals and an irrational rejection of a market-price offer. Other times, it can be attributed to foolish self-imposed time-limits, such as when a bank negotiator, who has taken three months to look at a pile of offers, tells the seller’s accountant he has only one hour to provide an updated profit and loss statement or the file will be closed, thus requiring the entire process to be started from scratch.
According to the National Association of Realtors, approximately five million homes were sold last year. If we estimate that one million were short sales, it is reasonable to assume that there may be an annual taxpayer loss of as much as $100 billion due to this sort of banking incompetence.
A seventh short sale transaction in December did not close. As listing agent, I brought the bank an offer of $185,000, but the bank refused it, saying the townhouse was worth $205,000. A month later, the highest offer I could get was $135,000, which they rejected saying the property was worth $155,000, despite the fact that unsold listings in the same complex were priced in the $120,000’s. The townhouse went into foreclosure and is now on the market for $115,000. In addition, the homeowner association (HOA) has been fining the property at $100 per day for months: the final sum owed to the HOA will be upwards of $18,000. Since the bank refused the initial $185,000, the loss to taxpayers on this transaction will be at least $88,000.
The oak, which is the national tree of the US, is a symbol of Zeus, the Thunder God and strength; but lately our banks have proved themselves unworthy of this distinction. They have become welfare bandits when they should be pillars of stability for the community. They have accepted taxpayer dollars without weeding out incompetence and senseless waste. They are rooted at the center of the senseless bailout efforts, and we should be angry about it all.