There’s a dirty little secret in the mortgage banking industry today. With every short sale, the banks are ‘realizing a loss’, but then booking an asset too.
A banker recently told me their entire staff of loan modification specialists are being cross trained as collection specialists, because someday (in the near future) they will turn their attention to collecting on judgments created by short sales.
Here’s an example of how a short sale may be a profitable trade for a mortgage bank in the future: $200,000 mortgage, against a home that has fallen in value and is short sold for $150,000. The borrower walks away from the closing with a 1099 for $50,000 from his lender. The lender still has a personal guarantee for that $50,000. For up to 10 years, this judgment is valid, income garnishments are possible. Today, the borrower can’t pay, but someday, things will get better.
The bank can sit on these judgments or sell these claims to a collection professional. Many borrowers believe that after closing, the losses are over…
Short sales with a lingering deficiency judgment is not freedom, but a new form of American indebtedness.
Post a Comment