Marin County Short Sales: Why Banks Are So Slow To Approve Them

Unlike so many agents out there, we have embraced short sales as a way to buy and sell real estate.  Yes, they take too long, the outcome is uncertain, and they drive everyone involved nuts. Nonetheless, short sales offer some real positives:

1. Buyers usually get a great deal.

2. Sellers get out from under a crushing load of debt.

3. Old inventory gets absorbed, at a realistic price, which helps the overall market.

Most fulfilling for us has been that in a short sale, the “win-win” that we all search for in a successful transaction takes place at an even deeper level. We’ve successfully negotiated short sales for several clients in the last year that resulted in no definciency agreements to the seller at all. Believe me, when someone is staring down a possible foreclosure and the resulting hit on their credit, and then they end up free and clear of the whole thing with minimal damage, well, it makes all the pain and suffering worth it.

Logically, banks should want a short sale to go through also. This is primarily because by the time the home goes through foreclosure, the home will be worth less from neglect and declining values than if they completed the transaction now.

And it’s not like people aren’t trying. There are currently  257 homes for sale in Marin County listed as short sales as of today, and an astonishing 72% of them are in contract! The price range is from $112,000 to $2,900,000, so in Marin County, short sales are happening everywhere now, even Kentfield!

This home in Kentfield, new construction, originally priced well over $4,000,000, is now a short sale at $2,900,000.

So why aren’t banks moving faster? A conversation with a family member over the holidays finally made the light bulb go on for me. He works in a prominent position for a large bank, and said, “So you want to know why the banks won’t approve these things, even though you and every other knucklehead involved are calling all day, making us add staff just to handle all the calls and tell you we’re working on it? It’s all because of the change the government made to the mark-to-market rules.”

Here it is in a nutshell. When a bank carries a loan for $1,000,000, it does not matter anymore from a bookkeeping standpoint if it is only worth $600,000. In the past, the bank had to change the value to reflect market value, i.e., “mark to market.” Last year that changed.

So even if the loan is in default, and there hasn’t been a payment in a year, the asset is valued at $1,000,000. The day the bank approves the short sale at $600,000, the bank’s assets decrease by $400,000. That’s $400,000 they don’t have anymore to loan to other people, or at a five to one ratio, $2,000,000.

Even though the bank will eventually need to take the loss, they are, in effect, rationing them out gradually, so the effect on capital isn’t too severe. Approve too many too quickly and the bank could suddenly be in violation of federal guidelines for capital reserves.

Short sales are still a great way to get a good deal for those with patience and guts, even in Marin County. But unless government laws change, don’t expect there to be any change in how quickly the process moves. The banks just don’t have an incentive to do it.

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