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Wednesday, October 22, 2008

Coniving Financists

My brother Michael tried to buy a house in Kalamazoo, Michigan. His report on the experience:
The house in Kazoo was a total bait and switch. I am appalled at the idiocy of realtors. "You must have the offer in today." So I do. Next day. "Oh yeah, it takes three months to close on a short sale." Thanks a lot.

It turns out that buying a short sale is a huge waiting game, especially with this backlog and very few are actually sold as short sales. Another real estate farce.

How it typically works is like this (as I can remember):
  • Homeowner (HO) can't make mortgage payments.
  • Notifies lender.
  • Lender says sell it.
  • House goes on market.
  • No buyers.
  • HO asks lender for short sale approval, lowering the asking price below what they owe.
  • Lender says ok and listing price is lowered.
  • Interested bargain hunters respond with offers, giving the lender a better idea of the current market.
  • Lender drags feet on approving short sale.
  • Offers expire and bargain hunters move on.
Now what is really little known, NOT reported at all, and hard to prove but easy to visualize is this:
  • The original HO took out (or equitied out) a 95%+ (or adjustable) mortgage (or some such nonsense) and that requires PMI (private mortgage insurance).
  • Then their mortgage resets, they lost their job, tired of making payments, divorce, whatever. Life has hiccups. The bank doesn't care. They will get paid from the PMI, terms not really known. They know the value of the house since they got bids. The bank recoups enough from PMI to let them sit on the house indefinitely.
  • The house sits empty, PMI insurance paying the mortgage.
  • Eventually the bank sells the property after it's loss is covered.
That's how I'd do it if I were a bank.

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