In a short sale the lender (or lenders) agree to forgive a portion of the debt, typically because they see little or no prospect of repayment from the borrower. Over the last 6 years, banks have been inundated with pleas for leniency and forgiveness from distressed borrowers. And some not so distressed borrowers.
Overall, the short sale process has been anything but short, and generally quite frustrating for all involved.
Last month Dmitry and I helped both buyers and sellers to finally close on a short sale purchase of a condo in Birmingham that I first listed in December of 2010! This, the third buyer, waited more than a year for the lenders to finally make determination that the short sale should be granted to the seller. Two previous buyers decided they could not wait out the indecisive bank, and who could blame them?
So why is Michigan Supreme Court Justice’s Admitted Mortgage Fraud NOT a Victimless Crime?
On January 29th, former Michigan Supreme Court Justice Diane Hathaway pleaded guilty to mortgage fraud in connection with the sale of a home that she owned in Grosse Pointe Park. She and her husband owned a home in Florida that was free and clear of mortgage debt and they transferred it out of their names into the names of one of their adult children just prior to applying for the short sale. After the short sale was approved the home was transferred back.
Diane Hathaway resigned amid the allegations.
But it’s not just Mrs. Hathaway’s lenders who lost out here.
- Her neighbors suffer her decision. Short sales typically sell for less than traditional sales to make up for the aggravation and uncertainty that accompanies attempting to buy one. Appraisers and don’t throw out those lower values when they are trying to establish the value of a neighboring home for a refi or purchase loan. While they might be given some consideration, the sale pushes down the value of neighboring properties.
- Grosse Pointe Park loses out. Lower property values mean lower taxes collected to fund things like schools, police, fire fighters, libraries and parks.
- Future home buyers in Grosse Pointe Park lose. What if the house they want to buy doesn’t appraise because of her transaction? Then the buyer either needs to bring more cash to the table or try to get the seller to lower the accepted offer price.
- Bank customers lose. Banks are focusing their efforts needlessly on clients like Diane Hathaway who may not have even needed a short sale. In the meantime they slowed down in processing short sales for borrowers who are truly distressed.
- Bank shareholders lose. The bank is supposed to work to limit it’s charge offs to protect it’s shareholders.
- The American Taxpayer loses. Many of these defaulting loans are actually backed by Fannie Mae and Freddie Mac. So the losses on many short sales are passed along to taxpayers in the end.
A supreme court justice violated the public trust and left a stream of victims in her wake, not just ING Bank.