Banking Law

In South Florida, the pickings are slim for those who push short sales. They may be trolling, but the banks aren't biting.

Local real estate professionals say there is growing interest in the residential short sale, but only grudging acceptance among local banks.

Short sales inevitably become more common in a down market - where the seller's lender agrees to accept a payoff of less than the balance due.

But getting a lender to approve a short sale can be a matter of grabbing their attention, which is often reserved for higher-priced properties. And many banks have too little manpower or experience in handling such transactions.

As FDIC Chairman and consumer advocate Sheila Bair can certainly testify, what a big brained outside "expert" thinks is in the best interests of banks doesn't always convince those thick-skulled bank managers to move in the manner the "expert" thinks they should. Some banks just don't see why they should jump on the short-sale bandwagon.

Real estate experts say two things at banks cause slow acceptance of short sales: lack of manpower or training and a simple backlog of distressed loans. Those factors are leading some to recall the Resolution Trust Corp. (RTC), which was eventually created to resolve loan problems following the savings & loan crisis of the late 1980s and early 1990s.

The short sale helps the bank clear bad loans from its portfolio and avoid foreclosure costs. It generally requires the seller to prove hardship with a letter, bank statements and tax returns. It can hurt the credit of a seller, but not as badly as a foreclosure.

Contrary to what the "experts" say causes "slow acceptance" by banks, bankers themselves say it's not manpower shortages.

"We want to avoid foreclosure, certainly. But the bank is going to ask for some consideration for the difference in a short sale, something like a deficiency note, if someone has the ability to pay," [United Bank senior Vice President Richard] Purdy said. (Under a deficiency note, the borrower would eventually pay back the difference between the short sale and what the bank is owed.)

"There's a big difference between a borrower who cannot pay and one who chooses not to pay," Purdy said.

The gist of the critics' arguments seems to be that that banks simply "don't get it," that real estate prices have fallen and that, today, the property often can't be sold for the amount of the debt. Therefore, since the value of the collateral is less than the amount of the debt, the bank, not the borrower, ought to "take it in the shorts" via a short sale, because that's the best deal the bank's going to get. The borrowers are going to walk away and declare bankruptcy if they have to, and the bank will have additional losses in the interim.

What banks in South Florida seem to be saying is that they do get it, but they aren't going to accept a short sale unless their analysis of the alternatives leads them to conclude that a short sale is the best recovery that the bank can expect under the circumstances applicable to an individual loan. That requires a case-by-case determination. Sure, it's a frustrating process to ivory tower dwellers, holier-than-thou bureaucrats, hungry-for-a-commission real estate agents, and every other interested party outside of the bank. In the end, however, the banks will decide for themselves what's the best business deal for themselves.

Unless, of course, Congress adopts laws that force them to act against their own judgment in order to satisfy either a political agenda or, worse, the faulty perceptions of some regulator who knows as much about what's in the best interests of a bank as could be expected from someone who's never actually been employed by a bank.

In the following song, simply replace "people" with "sellers" and you've got yourself an anthem for our current age.