California Association of Realtors Open Letter on Short Sales

by on March 15, 2011 · 22 comments

in Economy, Popular

So last Thursday my ‘union’ (California Association of Realtors, CAR) spent the equivalent of several thousand years’ worth of individual members’ dues publishing an ‘open letter’ in every major newspaper in California.

I use the term ‘union’ loosely here, as the preferred nomenclature is ‘trade association.’ While membership is not mandatory, it is compulsory in many offices, and dues are spent lobbying government for legislation that benefits members and improves their work environment and job security. They negotiate member benefits, such as reduced-cost health care and other insurance benefits only available to members, and fight with major employers in our trade against a drive to reduce pay scales (namely the banks that control most real estate transactions these days, either in the form of foreclosure or short sale listings). The definition of a union, per Wikipedia, is as follows:

“A trade union (British English) or labor union (American English) is an organisation of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members (rank and file[1] members) and negotiates labour contracts (collective bargaining) with employers. This may include the negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies. The agreements negotiated by the union leaders are binding on the rank and file members and the employer and in some cases on other non-member workers.”

While the people I’m compelled to send several hundred dollars to annually perform many (if not all) of these functions, they prefer to be referred to as a ‘trade organization.’ Most of the rank-and-file members protest the idea of a union as a device for the unequivocally lazy to collect greater pay than otherwise deserved, and therefore refuse to acknowledge their participation in a highly comparable group.

Tangent aside, let’s get back to this open letter that was published. I won’t bother copying and pasting the whole thing here, but if you didn’t get a chance to read it in the local fishwrap, you can take a peek at HERE.

The stated purpose of this commentary is to alert Californians to the peril homeowners in our state face: over 640,000 have lost their homes to foreclosure over the last 3 years, 30% of those who still own are ‘underwater,’ owing more (most times considerably more) than their homes are worth in today’s depressed market. We need help, and the current government intervention isn’t providing that help. The program that provided a hefty tax break to anyone bold enough to buy into a declining market steadied sales levels temporarily, as new buyers sought to profit off the misery of those who purchased at the peak of the market in the middle of the last decade, but once the credit expired sales once again began to dip. The Obama administration’s Home Affordable Modification Program, which aims to keep struggling and often underemployed borrowers in their home, admits that it is likely to assist less than 800,000 families nationwide before it expires in 2012, fewer people than have already faced the loss of their homes through foreclosure, short sale, or deed in lieu of foreclosure in our state alone, with more bleeding to come.

While this is indeed a travesty of the first order, I can’t imagine anyone who’s been paying attention these last few years is unaware of the magnitude of the crisis. What’s new in the letter is a public plea for action on the part of bankers and regulators that control the short sale process.

At present, a myriad of lenders impose vastly different procedures and timeframes on negotiating a short sale, where a borrower who can no longer afford a home due to either loss of income or changes in the terms of a loan that will often cause a payment to skyrocket to nearly double the level at which the borrower was initially making. In order to facilitate the sale, the lender agrees to write off the difference between the value of the home and the balance on the loan as a loss – the borrower loses any money they’d used as a down payment and forfeits any monies paid toward reducing the principal balance.

Recent state legislation has been enacted to ostensibly provide protection to consumers and make things more difficult for lenders, who one would believe should have been more sophisticated than the average borrower in assessing the risk of the mortgage loans they were offering. One major example is that banks are no longer allowed to force a borrower to sign an unsecured note for whatever loss they incur, meaning the person losing their home is still out all of their savings used for a down payment and home improvements, but that they’ll no longer have to spend years continuing to make payments on a house they don’t possess or face a lawsuit from their former lender seeking collection. There’s also a temporary forgiveness program that means borrowers (this year, at least) won’t have to report the amount their lender loses through a short sale or foreclosure action as if it was income, owing taxes on that money to the federal government as if they’d actually profited (imagine being told next tax season you’ve got to pay taxes on $100,000 or more of income you never received). But I think we can still agree that there’s no positive for a consumer facing short sale, other than the relief that comes once the burden of debt is finally lifted, hopefully before the inherent stress causes medical or family solidarity issues.

Still, a short sale or loan modification (that allows a borrower to re-negotiate payments but usually not debt levels in order to remain in their home) is exceedingly difficult to achieve – the California Association of Realtors estimates that only about 60% of short sales with a ready, willing, and able buyer already located are allowed to close escrow by the seller’s banks. It can take 90 days or more for a bank to even look at an offer they’ve been presented, and banks are notorious for losing paperwork or failing to review it before the documentation provided has grown stale and needs to be updated. It’s not uncommon to provide the same documents 10 times or more before their receipt is acknowledged by the bank’s processors, and the open letter alludes to some banks demanding the same paperwork 50 or even 100 times. During this waiting period, a buyer may tire of waiting for sale approval and move onto another house, starting the process all over again for the buyer and their agent.

What do we need to fix this situation? Surprisingly, C.A.R. advocates a position that starkly contrasts the usual free-market ideology of its leadership and white-collar members: more government regulation. They want a standardized format for gathering and submitting information. They want the government to impose strict time frames for a lender to process an application and render a decision. They even want the government to force the banks to hire a staff adequate in number to efficiently handle the volume of work they’re tasked with.

For once, I agree with them.

{ 22 comments… read them below or add one }

avatar RB March 15, 2011 at 1:21 pm

Why doesn’t Canada have a crisis?
Why didn’t the US have a crisis for sixty plus years?
It is all about a down payment….skin in the game.
Bring back 20% down payments.

People are not going to be saved with a new loan on a home they still can’t afford.
Note: Banks will make loans. I did not have problem getting a 4.3% , 30 year fixed, in 45 days in January.


avatar Ian March 15, 2011 at 3:50 pm

Canada’s housing (as with China, Australia, and much of the world) crisis is just beginning. They have an even larger bubble than we had. You are correct that their higher down payments will buffer the collapse as it will take longer for owners to enter the red. Their mortgage rates are in the 2% range.

As long as you have equity you can get a loan. If you have less than 20%, why would a bank offer you a loan?


avatar Shane Finneran March 15, 2011 at 2:35 pm

Wow, you know an industry’s in trouble when they ask for government regulation! Maybe CAR recognizes that some people who are now in a position to buy a home have seen what has been going on in housing and are not at all interested in throwing their money into such a mess.

My sister-in-law in LosAng was recently a victim of the banker shenanigans that CAR is talking about. She had a short-sell buyer ready to take her property off her hands, but at the last minute, the company that now holds her mortgage nixed the deal. Home prices in her neighborhood have continued going downward, so the mortgageholder can’t find any buyers at that price that was ready to go. Something’s afoot.


avatar Ian March 15, 2011 at 3:56 pm

Industries ask for government regulation all the time, it is how they gain favor and advantage in competitive market places. (I am not saying that regulations are bad, in fact they are necessary…. they just have to be well thought out, with the unintended consequences accounted for)

The banking and housing industries are the most heavily regulated industries, besides health and energy, what do they all have in common?

Housing and banking are are convoluted debacles, any new regulations they tack on will be like trying to clean your teeth with sandpaper after eating poop.


avatar Ian March 15, 2011 at 4:05 pm

It doesn’t sound like a union, more like a lobbying group. Unions (unless we are talking public unions) use collective power to influence an employer. A lobbying group uses collective power to influence politicians, and governments for regulatory advantage.

As for the sad situation in housing, anyone who didn’t see the collapse coming had their head in the sand (99% of the population); most people still have their heads in the sand, and think that we are close to a bottom.

Housing prices are still inflated in most of the U.S. Trying to prop up the inflated prices will just prolong the suffering. People who are in the red, and don’t have the means to wait 10-20 years, and pay for the bad deals they made should just get out of their bad investment and leave the banks to handle the problem they helped create.

People should feel no shame in defaulting on these ridiculous loans. Screw the banks. They don’t give a crap about you, so why should you give a crap about them.

Sorry for my potty mouth….


avatar Dave Rice March 16, 2011 at 8:33 am

This is the kind of attitude I predict more and more people will adopt in the coming year, and it’s what will get the ball rolling for what’s hopefully the last big dip in values before we truly do bottom out (and proceed to flatline for several years). For the last few years, and even today, the dominant attitude seems to be that there’s something immoral about sticking the bank with your bad decision to buy a house at the wrong time.

On the flip side, however, that hotel group that ‘strategically defaulted’ on their loans on a handful of properties including the posh W boutique hotel downtown was applauded for making a good ‘business decision’ by cutting loose bad debt and increasing their bottom line profitability. A company that lays off workers and demands increased productivity out of those remaining by bandying the threat of another round of firings is cheered for being more efficient, not immoral. Why should a consumer in a capitalist nation be expected to behave any different than the lords they serve?


avatar Ian March 16, 2011 at 9:20 am

I agree Dave, it takes a while for general social attitudes to change. It will take quite some time for people to realize that their home values are still greatly inflated. It will take a quite some time for people to realize that the banks get to create the money for their loans out of virtually thin air, so there is nothing immoral about destroying that free money by defaulting on a loan.

The Fed and central banking cartels are trying to circumvent normal business cycles, they will lose.

I am patiently biding my time, preparing to buy when the prices are severely depressed, and everyone hates real estate.


avatar Shane Finneran March 16, 2011 at 10:22 am

Ian, what is your gauge for when it’s the right time to buy? One metric I think is critical is rent-cost-to-purchase-cost ratio.

One interesting thing about Canada – you can’t write off your mortgage interest against your income up there. The tax code doesn’t include that giveaway to homeowners, like ours does.


avatar The Mustachioed OBecian March 16, 2011 at 10:48 am

The bottom of the market is only insofar as a buyer estimates they have a good deal. Suggesting that we’re not near the bottom is a bit short-sighted. A great deal depends on the individual submarket within a region, and a number of areas in San Diego are reaching their nadir. Follow the commercial real estate markets to get an idea of where and when is a good time to invest in a home. It’s a bit of a leading indicator.

Sure, banks are at fault for dishing out money like candy without considering the bottom line. But it doesn’t take a genius to figure out that your $40,000 salary isn’t sufficient to afford a $500,000 home, no matter what a lender says. A bit of personal account can go a long way. Defaulting on loans will only lead to a longer crisis. If you can afford the payment, you have an obligation to pay, otherwise, why sign your name on the dotted line?

With the possible dissolution of Freddie and Fannie on the block, we’d return to an era with 10-year mortgages and 50% down. While that might not be a terrible idea, it would certainly take a considerable amount of time for the market to adjust to the new practice. Those short sales would turn into foreclosures a bit more readily.


avatar Ian March 16, 2011 at 2:47 pm

You are correct that submarkets react differently. The local ones (east county San Diego) that have fallen the most are closest to their nadir, and those that have fallen the least (PL, OB, and other coastal and affluent areas) are furthest from their nadir.

The coming deflationary period will be toughest on those who are the richest. The government and central banking attempts to circumvent normal business cycles has led to rampant speculation by the rich, and flowing capital into their coffers. Hence the growing income gap. A deflationary period will put this all to an end. Housing will not be spared.

Most people that can afford their payments will not be able to in 2 years, and those short sales will definitely be foreclosures.

The spin doctors out there want you to believe that falling home prices are a bad thing, but in the end it will make housing more affordable for the average joe.


avatar Ian March 16, 2011 at 2:31 pm

Everyone has a different gauge, mine is quite contrarian; most people who have been brainwashed by the real estate industry (or are a part of it) will think I am crazy. But the best time to buy is when interest rates are high. People determine what they can pay for a house not by its total value in dollars, but by what they can afford in a monthly payment. When interest rates go up (I expect double digit rates for a 30 year fixed in 3-5 years), home values will go down dramatically, because the cost to borrow and monthly payments will be very high, and that will be the best time to buy. Then when interest rates come back down you refinance.

The main driver of home values is interest rates. Prolonged low interest rates (cheap credit) are the main reason for the real estate bubble, and the continued low rates and cheap credit are the reason we are not close to the bottom. When interest rates rise because of real monetary inflation there will be sever downward pressure on home values.

Rent to Mortgage Ratio, and Income to Home Value ratios, are good gauges also, and are what kept me from buying a home during the bubble. The problem is that we are facing a strong deflationary environment (what the Fed is trying to fight through highly inflationary tactics, but they will fail and strong inflation will happen after the deflationary period), so I expect rents and incomes to fall over the next 3-5 years.

I don’t think that the government should provide a tax advantage to home debtors. It further props up home values, and makes them unaffordable. It is amazing that the Canadian bubble is as inflated as it is without such a subsidy, it just means it has that much more to fall.


avatar Shane Finneran March 16, 2011 at 3:26 pm

I need a history lesson on when it became acceptable to borrow money to buy a house. Why not wait until you have enough money in the bank to buy a home? Seems like a dangerous combination of impatience, greed, and social pressure.

When I paid off my car several years ago, I realized that I’ll never borrow money to buy a car again. Being in debt sucks. And accordingly, I’m having trouble figuring out why it’s smart to buy a home until you can pay for close to 100% in cash.


avatar dave rice March 16, 2011 at 6:01 pm

Ian – on one hand I think you’re right – increasing interest rates definitely drive home prices down, as most buyers aren’t buying a price so much as they’re buying a monthly payment that they can easily compare to the cost of renting. When the monthly payment goes up, their total budget for a home goes down correspondingly.

But I don’t think that the drop in values fully offsets the increase in cost, as another factor increasingly comes into play as interest rates drive borrowers out of the market – cash buyers. Even with rates as low as they are today, 30% of sales are being conducted with all cash. I personally think this is a bit premature for long-term investors to be snapping up properties, given that I believe prices will continue to drop when rates inevitably spike, and given that the cost of funds will remain zero for those who already have the money. But they’re out there and making deals, and as values fall, the big investors will make up a bigger portion of the market, thus artificially stabilizing prices and effectively pricing those out of the market who’d waited to buy using credit in a high-interest-low-price scenario.

This doesn’t even take into account the tax advantages an individual forfeits whenever they choose to delay purchasing in favor of renting. Think what we may of write-offs for carrying debt, but our current government system allows it and anyone who’s not taking advantage of the law is losing out.

Of course, if you can amass cash to purchase a home while still paying rent, you may still be better off in your scenario – and the more cash you have on hand, the greater your benefit will be.


avatar Shane Finneran March 16, 2011 at 7:21 pm

Dave, I agree there’s value in interest tax write-offs. But to me, latching on to that as a rationale to buy a house seems like a bit of the brainwashing that Ian mentioned earlier.

I mean the fact that you get 25ish% of your interest payments back in the form of reduced taxes still leaves you paying 75% of the interest payments. In effect, renting the money to buy the house, instead of just renting the house, no?

And when all other buyers get the same credit, doesn’t that just push housing prices up by an offsetting amount? Like the “homebuyer credit” of $8,000 that the IRS offered a little while back. Should have been called “homeseller credit” because all buyers had an extra $8,000 to spend. Which benefits sellers, not buyers.


avatar Dave Rice March 16, 2011 at 8:48 pm

You’re right on both counts, Shane. Which is to say that in a free market without government subsidies, people would demand lower prices or interest rates. But in the world we live in, the subsidies exist, and they create a proposition where you could be paying $500 or more a month more to own than rent and still break even or even come out ahead for owning. Of course, if we reform this law it’s going to create a flood of owners that will be wiped out because the tax benefit is the only thing that makes ownership make sense. And you can bet the monied interests that gain far more than any individual from these tax laws will be dragging out poor old grandmas in droves to make us feel inhuman for ‘stealing their homes.’


avatar Ian March 16, 2011 at 10:24 pm

Dave, to be fair, the only way the repeal of the mortgage interest tax credit would be viable would be to have a corresponding reduction in Income Tax rates. This would offset the tax increase that homeowners would burden.

Such a subsidy only complicates the tax code because the market adjusts to the subsidy through inflated home prices. It becomes a wash, and only makes the cost of entry higher.

The same concept is true for all government subsidies and tax loopholes.


avatar Dave Rice March 17, 2011 at 10:51 am

Well what do you think of the proposal floated late last year to cut the amount of debt upon which interest could be written off from $1,000,000 to $500,000? If the deduction is ever going to go, it’s going to have to be phased out – if you think the markets have been in upheaval the last few years it’s nothing compared to how things will look if you took the deduction away in one fell swoop.

I like your idea of an offsetting drop in income taxes in general to make up for the lost deduction, but even still that’s going to be taking money from the pockets of the owners and putting it into the pockets of high-income renters. Which I like, because it makes it more likely those renters will eventually be able to save a significant down payment and thus someday purchase on terms that will make their ownership likely to survive the market’s inevitable tumbles.

avatar Ian March 16, 2011 at 10:18 pm

Dave, I understand you point. I just think that the forces of high interest rates are much stronger than those of “cash buyers”. Which of course, is my plan. I plan to have a high down payment to offset the cost of the high mortgage rates. In dollar terms it will be a wash at the time of purchase, but I will expect interest rates to fall, and home prices to rise again.

If I had significant cash now for a down payment I would consider buying now to weather the continued deterioration of value, but as of now, there are better places for my cash.


avatar The Mustachioed OBecian March 17, 2011 at 10:50 am

A bit late, but I’m inclined to think that prices at the beach are reaching their bottom. The beach communities have intrinsic value that other communities will never have. And OB, specifically, is its own real estate universe. With such a finite inventory, prices will drop only so much. I purchased my place 2 years ago in OB, and the value has already increased by more than 10%.

As for interest rates increasing dramatically as suggested above, we’re going to have larger worries on our hands than real estate when we have double digit inflation rock the country. That’s not really a subscription for getting out from beneath our current economic maladies.


avatar Jane A. Knight March 15, 2011 at 9:53 pm

Hoping someone can help me with some questions? Which is a smoother process a short sale or loan modification? Also I read that after two years, you can re-apply for a loan and buy a house after foreclosure. I am wondering if this is true. What is your opinion on doing so? I hear that can be a good time to buy because there can be more government assistance and lower rates at this stage. Any thoughts? Below is a site I have been sourcing for my info. I like their short sale calculator. Looking for a second opinion. Thanks! — Jane


avatar Jane A. Knight March 15, 2011 at 9:54 pm

Oops I forgot the link. Here it is
– Jane


avatar Shane Finneran March 16, 2011 at 3:28 pm

Wow, it’s almost as if you’re trying to drive traffic to that site! Definitely helps to include the link to the site.


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