Monday, November 16, 2009

FDIC Hurting Distressed Homeowners

FDIC Hurting Distressed Homeowners

As set forth in this FDIC publication, IndyMac Shared-Loss Agreement, the FDIC is making so called "Shared-Loss Agreements" (SLAs) with investors who are willing to purchase the assets of insolvent financial institutions.  Without going into all the details, these SLAs basically offer these investors guarantees on huge percentages of any net losses that they may suffer as a result of their investment in the failed financial institution.  In this particular case, the FDIC is paying for 80%+ of the net losses of the investor (OneWest Bank) who purchased the assets of IndyMac. Basically, the Net Loss is calculated by taking the current outstanding balance of the mortgage note (at the time of the loan purchase) less the net proceeds of the short sale or foreclosure offer price.

The reason this is a problem for financially distressed homeowners is that due to the loss guarantees provided by the FDIC, the investors mentioned above have very little financial risk in the deal.  Therefore, they have incentives to take what would normally be a big risk (but isn't due to their sweet loss guarantees courtesy of the FDIC) such as foreclosing on homeowners to try and squeeze out more profit even when there are feasible alternatives to foreclosure such as short sales and loan modifications.  As a result, these investors are making it difficult and even impossible to get loan modifications and short sales approved.

In her blog post, Is the FDIC Killing Short Sales, Alexis McGee of states that "IndyMac was taken over by the FDIC and sold to OneWest Bank in March/2009. Guess who the investors are behind OneWest? George Soros, Michael Dell, Steve Mnuchin (former Goldman Sachs executive), and John Paulson (hedge-fund billionaire)." She goes on to describe the terms of the SLA.  The highlights are below:
  • The investors purchased all current residential mortgages at 70% of par value (70% of the outstanding loan amounts).
  • They purchased all current HELOCS at 58% of Par Value.
  • The FDIC stepped in and guaranteed that for any residential mortgages where OneWest experiences a loss, the FDIC will step in and cover anywhere from 80%-95% of the loss. The loss is calculated using the current outstanding balance of the mortgage note (at the time of the loan purchase), not the amount that OneWest paid for the loan.
  • For foreclosures, the FDIC picks up 80% of the tab on all of the extra costs associated with a foreclosure (BPO’s, upkeep, utilities/maintenance, legal fees, etc.)
Here is an example which shows why this creates a problem for financially distressed homeowners who would like to do a short sale, or obtain a loan modification.  Let's say one of the loans that OneWest purchases has a Current Loan Amount of $500,000.  Based on the 70% purchase deal described above, OneWest would have paid $350,000 for this loan.  Also, let's assume that an all cash investor wants to purchase the property via a short sale for net offer price to OneWest of $200,000.  Below is the analysis of this situation:

  • The Net Loss, according to the FDIC calculations, is $500,000 (i.e. the current outstanding balance of the mortgage note at the time of loan purchase) less $200,000 (i.e. the net proceeds of the short sale offer) = $300,000.
  • Based on this $300,000 Net Loss, the FDIC pays OneWest $240,000 (i.e. 80% of the Net Loss).
  • One West would then be able to sell the property in question for the short sale Net Offer Price of $200,000 and end up with total revenue of $440,000 ($240,000 + $200,000) for a loan that they paid $350,000 for.  Therefore, OneWest will have made a profit of $90,000. 

The reason that this situation creates a problem for a financially distressed homeowner seeking a short sale is that since the FDIC (per the information above) pays 80% of the losses of foreclosure there is no incentive for OneWest to mess around with a short sale unless they can make much more money.  That is why they are demanding absurd short sale settlements and promissory notes from the homeowner.  Of course, there is absolutely no incentive to offer a loan modification so that request would be dead on arrival.

According to Alexis McGee, "The scary thing is that over 50 banks have Shared Loss Agreements in place with the FDIC. Some of them include: Bank of America (go figure), CitiMortgage, Wells Fargo, etc."  I have to agree.  That is truly scary.  I can already see the pain and anguish of hundreds of thousands, if not millions, of financially distressed homeowners as they are unnecessarily dragged through the foreclosure process.

If you are a Middle TN homeowner, property owner, real estate investor, home builder or real estate developer who cannot pay your mortgage payments (due to losing your job, having your income reduced, illness, health problems, adverse business conditions, slow sales, loss of investment property tenants, vacancy issues, lack of funds to complete the project, feuding business partners, etc.), know that you will not be able to pay your mortgage, have defaulted on your mortgage, are already in foreclosure, or owe more than your home is worth, please contact me to discuss your options including a loan modification and a short sale (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home). I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I primarily help sellers (homeowners, property owners, real estate investors, home builders and real estate developers) of distressed real estate, short sales, pre-foreclosures, foreclosures, investment properties, failed new construction projects and struggling commercial real estate developments located in and around Middle Tennessee (Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN and Belle Meade TN).  If you do need to short sell your home or property, or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

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