By Mike Parker

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.

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Published with permission from © Mike Parker 2010 Mike Parker mparker@theblackwatercg.com