Recently I have had, to put it mildly, disappointing experiences with buyers who were supposedly pre-qualified, yet no more able to get a loan than to sprout wings and fly. Apparently lenders are not asking all the questions they need to ask. It’s not that I want to get inside my clients’ financial statements, but for my sake and theirs I’m going to start asking the questions if the lenders won’t.

First question: Okay, Buyer O’Mine, are you being paid on a W-2 or a 1099? You don’t know? Well, are you self-employed and reporting income on a Schedule C? Your blank stare tells me you have no clue what a Schedule C is, and that’s fine. So you work for someone else, you have a boss? Yes, okay, great. How do you get paid? You work for your uncle and he pays you in cash? Okay, no problem. At the end of the year, does your uncle give you a document that says how much he paid you during the year? And do you attach this document to your tax return and send it to the IRS to show them how much you got paid? No? Now we have a problem.

We have a problem because your uncle is almost certainly evading payroll taxes on your salary. You are getting paid under the table and maybe you thought it was not a big deal. Here’s the bad news: It’s a very big deal. A mortgage is a loan, a big big loan, and the lender wants proof of your income to make sure you can make the payments. If your income isn’t documented, there’s no proof; and if there’s no proof, you can’t get a loan.

Go talk to your uncle and ask him if he can give you a W-2 for the time you’ve worked for him. He will probably say no, but at least make sure he puts you on payroll and gives you a W-2 going forward. Or else find a new job, if you want to buy a house.

Keep in touch, I’d love to sell you a house .. when you can buy one.

Second question: Buyer O’Mine, the lender is going to ask you for a bunch of documents, including tax returns for the past two years. Do you have those? Great. Now tell me this, and just be honest because it will come out during the loan process, did you mail those tax returns to the IRS? Oh, you haven’t quite gotten around to that yet? Yes, it does matter actually. Okay, no big deal. If you mail them now, you should get the all-clear fairly quickly, a few weeks. Your lender can explain the procedure; he or she will be glad to help you. We’ll just put this house buying thing on hold while you get that taken care of.

What? You’re not sure about sending in the tax returns right now? You are going to owe some taxes, not that much, but you don’t have enough cash to cover the taxes and buy a house too? Of course I understand, stuff happens. It sure does. Stuff happens to all of us. Well, I think we’re done for now. Keep in touch, I’d love to sell you a house after you’ve gotten straight with the IRS. You remember what they say about death and taxes, ha ha.

In the past, their lender could have switched these clueless Buyers to a stated income or a no-doc loan and slid them through with a slightly higher interest rate. Those days are gone. Loan requirements are tougher than they used to be, and that means that the questions asked up front need to be tougher, too.

When the New York Times can’t suggest a logical reason for widespread banking practices that’s a sure indicator that something is horribly broken and that something seems to be much of the entire banking industry’s mismanagement of short sales.

In an excellent article by Michael Powell published October 24, 2010 entitled “Short Sales Resisted as Foreclosures are Revived,” Mr. Powell sheds light on numerous actual banking decisions that just do not make financial sense in any marketplace. The cases he cites, however, are in Maricopa County, Arizona.

For example, he cites the case of one Ms. Lydia Sweetland. Having lost her job, drained her savings and retirement funds, she applied for a mortgage modification and (surprise?) was summarily rejected by GMAC bank. Ms. Sweetland reluctantly realized (after seven months of being unable to pay that mortgage) that perhaps a short sale would bring this awful situation to an acceptable conclusion for all concerned. Her mortgage balance was $206,000. She found a buyer willing to pay $200,000 for the property. That offer was rejected and she was notified that GMAC would foreclose on her within seven days, losing about $19,000 in the process that the bank would not have lost had they accepted the short sale proposal.

There’s no need for logic and fairness when all your bad decisions are bailed out.

In a half dozen more cases examined by the New York Times, Bank of America rejected short sale offers and foreclosed at lower prices. Brilliant! Having received Billions of dollars in federal bailouts (paid for, as we all know, buy US, the little guy federal taxpayers) Bank of America and other large banks can apparently perpetuate an economically disastrous practice that wrecks individual lives with nary a thought of logic or equity.

Holding 31 per cent of pending foreclosures in Maricopa County (which includes Phoenix and Scottsdale), this one bank is set up to lose hundreds of millions more than necessary by rejecting short sales and proceeding to foreclosure. I wonder, is Marie Antoinette the CEO of the bank? “Let them eat cake” has never resonated so strongly in the country as this economically destructive attitude does, now. Having never adopted the guillotine, we have no instant remedy to snap bank management out of this arrogant and financially stupid policy so the consumer rightfully feels disrespected and abused. That’s NOT a good thing. If the banking business thinks nothing of losing an unnecessary extra 10% of the principal balance rather than work with a buyer, they best not be surprised when the sanctity of the contract becomes invalid among most consumers. It’s a prescription for economic chaos.

“The dog ate my homework”

When it comes to ludicrous “justifications” for indefensible policies, it’s hard to top the excuse that kids sometimes use to “justify” not having their homework done. Listen, however, to the “justifications” for the banks’ reluctance to engage in short sales offered by those in the know, and quoted in the article:

· “Banks are historically reluctant to do short sales, fearing that somehow the homeowner is getting an advantage on them”;

· “{Banks} have this irrational belief that if you foreclose and hold on to the property for six months, somehow prices will rebound;”

· “banks computer systems repeatedly asked for and lost the same information and generated inaccurate responses:”

· “Servicers can reap high fees from foreclosures:”

· In a reversal of previous regulatory policy (changed April 2009), “banks can foreclose on a home and avoid writing down the loan until the home is sold, as opposed to taking the write-down immediately on a short sale;”

Sounds an awful lot like “Let them eat cake” to me.

But it’s hard for even these mercenary heartless bureaucrats to justify this one: A Mr. Nicholas Yannuzzi put 20% down and bought a one-story home for his wife, who had been diagnosed with bone cancer, so she would not have to climb stairs. Sadly, his wife later died, he lost his job and used his retirement funds to pay the mortgage for the past five months. Didn’t make any difference to Wells Fargo Bank, his mortgage holder: they rejected his request for a mortgage modification and then for a short sale.

So, after working diligently all of his life, never having a financial problem before, owning five homes and in the sunset of his life, he is now waiting to be locked out of his home.

Perhaps you may remember the movie “Network,” starring Peter Finch and written by Paddy Chayefsky, that won four Academy Awards, released in 1976 and now rated as one of the top ten films of all time. It was satire, but the protagonist’s mantra was this screaming phrase” “I’m sick and tired and I’m not gonna take it anymore!”

That’s what happens when you ‘let them eat cake’: chaos ensues.

Conclusion: They’re lazy AND it’s the money

Let’s all pretend that if we postpone the write-downs, it will all turn out okay in six months. Let’s all ignore the human toll this crisis is taking and “just follow orders.” Let’s all realize that in this dysfunctional political system we are now in, it’s every man and woman for themselves. Fee income considerations and the timing of balance sheet losses are now trumping the need to treat people fairly. It’s easier to “just follow procedure” than invent solutions.

What can an agent or broker do?

I have consistently said that the industry must embrace distressed properties, become expert at marketing foreclosures, and solicit buyers for those properties as this situation is going to be with us for a while. While we can’t change the economic situation, apparently, we can change our mind-sets and profit from foreclosures instead of throwing up our hands and giving up.

Maybe I don’t know politics. Maybe I don’t know financial minutia. Maybe I’m not capable of figuring out a cure for these problems with our economy and the market. But here’s something I do know: I know how to sell houses.

We’ve been pleased to hear key government officials comment this week that a national freeze on foreclosures isn’t warranted. On successive days, White House senior advisor David Axelrod, FHA Commissioner David Stevens and HUD Secretary Shaun Donovan all suggested that the downside of such a move probably outweighs any gain.

That’s our position as well. Although we’re not comfortable with shoddy paperwork and questionable “robo-signer” practices, the fact is that the vast majority of foreclosure actions are valid and involve people who haven’t made a mortgage payment in many months, sometimes years. These homes are going to be foreclosures sooner or later.

That said, all homeowners – as well as the buyers of these properties – deserve to have the process done correctly. Lenders and servicers absolutely should not have cut corners or accepted low standards within their operations, even with the overwhelming volume they’re facing. It’s much better to get it right the first time. Right now, the major players are reviewing their procedures and making adjustments, a process that doesn’t require a recovery-delaying halt on legitimate foreclosures.

We understand why some politicians are calling for a national foreclosure freeze, but we agree with leading economists, such as Moody’s Mark Zandi, who believe it would very likely damage the fragile housing market and significantly delay the rebound. It would harm buyers, ignite litigation, create uncertainty, and stall the vital process of clearing inventory and establishing market bottoms. What’s more, it would force servicers to focus too much attention on the end of the process; that time is better spent earlier, finding alternative solutions – such as loan modifications or Short Sales – for families in default.

We do hope this experience motivates all servicers to improve their systems for Short Sales. As we’ve emphasized for a long time, Short Sales often provide the best option for everyone involved. They need to be processed more efficiently than they are now.

There’s no getting around the fact that the last thing the housing industry – or the country in general – needed was a confidence-draining, headline-grabbing scandal. But that’s what we have. 

www.JustinCartier.com