The more I look at this foreclosure fraud settlement report, and the reliance on short sales for the allegedly positive results, the angrier I get.
Let’s first understand what the numbers refer to when the Office of Mortgage Settlement Oversight lists $8.67 billion in short sales. That number does not refer to the sale price of the home, but the difference between the sale price and the amount owed on the mortgage. This unpaid principal balance is then forgiven by the bank.
According to the OMSO, 74,614 borrowers took advantage of a short sale that qualified under the settlement, with an average of around $116,200 per borrower. This includes first and second lien remaining balances, on both short sales or “deeds-in-lieu,” where the borrower deeds the residents to the servicer or investor instead of a foreclosure (basically the same thing, only the “buyer” is the servicer or investor, instead of an outside third party).
This acts a lot like a waiver of a deficiency judgment. In the circumstance of a deficiency judgment, the bank can get a court ruling to go after a foreclosure victim post-foreclosure to get them to cough up the balance between what they ended up getting on a foreclosure sale and the amount owed on the mortgage. Banks rarely do this, for the simple reason that foreclosure victims typically don’t have a big pot of money to give them. It’s like drawing blood from a stone. So banks often waive deficiency judgments.
We can see the same dynamic here, the difference being that the bank is waiving the deficiency judgment, or in other words forgiving the balance of the mortgage after the sale, without having the home go into foreclosure. This makes sense for the bank, since sale prices on a short sale are typically better than a sale price on a foreclosed property, or REO (real estate owned).
But here’s the key point: 12 states are “non-recourse states.” In these states, the bank is prohibited from going after a foreclosure victim for the balance of the mortgage post-foreclosure sale. The non-recourse states include large ones hit particularly hard by the foreclosure crisis, like California and Arizona. (The others are Alaska, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington).
So how can the bank get credit for waiving a deficiency judgment, or doing effectively the same thing through a short sale, in a non-recourse state? There’s no prohibition against it. But what we’re saying in that instance is that banks are given credit for paying a “penalty” by not collecting the balance of a mortgage after the sale, something they are PROHIBITED BY THE STATE FROM DOING.
And guess what? The OMSO report breaks this down by state. So I can see that the five big banks participating in the settlement got credit for $522 million in short sales in Arizona and a whopping $3.9 BILLION in California. Those two alone equal over half of the total short sales in the report. If you total up all the non-recourse states (I’ve put their raw totals at the end of this piece), you get over $5 billion in short sales coming from states that bar banks from pursuing a deficiency judgment.
This is a handout to the banks. Some part of this $5 billion will satisfy their punishment in the settlement (not all of it; there are portions of a dollar in the formula based on where the loan was held in portfolio or was a securitized loan held by an investor). And it represents $5 billion these banks could never collect, $5 billion they’re barred by collecting by law. Banks should never have been allowed to count deficiency judgment waivers or short sale forgiveness in non-recourse states. But they are, and they’re doing it in big numbers.
APPENDIX: Here are the short sale totals for the 12 non-recourse states, from the report of the Office of Mortgage Settlement Oversight: [cont’d]
North Carolina: $58,909,048
North Dakota: $448,677