Why would a lender NOT approve this?

19 Replies

Short-sale approval obtained a while back... it's Friday, closing is Monday.

Purchaser had something come up and now wants to buy a different property and have his "friend" slip in and close on the deal. 

Assuming the right bank contact can be reached (and proper assignment, etc. executed), why would the shorting lender NOT approve this? Perhaps I'm not thinking of something.

Thanks in advance for any quick feedback.

This will not work. You cant just swap a buyer named in a short sale approval letter. Requires a new approval - usually at bare mimum this will take a few more weeks and require a bunch of new docs and review.

@Minna Reid Thanks. But why? Who the buyer is has no bearing on seller financials, value, or the net the bank has agreed to accept. 

So I assume whatever process that you say will be required would be to ensure that such a scheme is not an attempt to subvert the "related party" issue... although that is typically accomplished by an affidavit at closing.

Probably because it's a completely different buyer.  With one of the last short sales I purchased, I signed the initial purchase agreement in my name only so my wife didn't have to hassle with signing all the paperwork/disclosures.  (I was planning on adding her name after we closed.)  Anyway, at one point, I inquired about adding my wife's name before we closed and taking title in both of our names since it would save me a little bit of effort on the back end.  However, I was told that if we did that it'd have to go back through the bank's approval process and delay the closing.  So, in my case, I ended up just doing what I originally planned on and closed in just my  name and then added my wife on title later.  In your example, it's a complete change in the buyer, so I'd be willing to bet that the bank is going to take issue with it. 

@Tom Gimer    VERY VERY simple answer to keep wholesalers and no money flippers at bay..

they only want to sell to bona fide buyers.

Originally posted by @Tom Gimer :

@Minna Reid Thanks. But why? Who the buyer is has no bearing on seller financials, value, or the net the bank has agreed to accept. 

So I assume whatever process that you say will be required would be to ensure that such a scheme is not an attempt to subvert the "related party" issue... although that is typically accomplished by an affidavit at closing.

 For it to be a genuine short sale it has to be an arm's length deal.  In your example, the banks most likely don't have the confidence that its one.  One reason is they don't want wholesalers wholesaling the property. Another reason would be they don't want family members and friends buying the property using the backdoor.  

I have bought 2 short sales so far and converted them to rentals after 1 yr of living in them, and the bank makes you sign a piece of paper stating that you are not related to the seller.. 

@Tom Gimer just like buying with Auction . com once you have an accepted offer you CANNOT change vestings even though I have bought ( well lets say a bunch of them off of this site) I have to follow the rules and I don't like it because I like to change entities occasionally as funds clear up in one LLC... But know got to close in the one I contracted in NO exceptions.. its the banks rules really.. and like what is posted above keeps the wholesalers from flipping this stuff. other wise some of the big wholesalers in Texas would be offering on every deal tieing them up and then trying to flip them to bona fide buyers..

I like it personally lets me have a methodical chance at this stuff with no interference from middle men. that are just acting like brokers anyway.

Yep, back in the day (2011 ish) when the bank’s were overwhelmed with shirt sale apps and couldn’t handle the volume.....a lot of deals slipped thru the cracks Way under value. One of the indicators of this was when the buyer assigned(wholesales/flopped). So they banned assignments to at least plug that hole.
Plus some buyers are on the banned list for short sales from past shenanigans.

@Wayne Brooks I still had my HML shop going then.. you should have seen those coming in wanting to abuse the poor banks LOL.... being a private banker I wanted no part of it..

Short sale approval letters are buy specific almost always so it would go back under review which could be quick or it could take longer then you'd like.

If the value is expired it's possible a new value would be ordered and the whole deal would be thrown off if the value cam back higher. That would be one example of things going south.

From a practical standpoint, while YOU can't assign your purchase, there is nothing to stop the seller from obtaining a new buyer, your friend. That said, still, everything changes and now the vetting process stars all over. They have to get all new documents. new purchase agreements, new earnest money , verification of source of new funds, run new OFAC checks, create new arms length affidavit. While it would be nice to think otherwise, those validations don't happen same day.

Originally posted by @Ron S. :

From a practical standpoint, while YOU can't assign your purchase, there is nothing to stop the seller from obtaining a new buyer, your friend. That said, still, everything changes and now the vetting process stars all over. They have to get all new documents. new purchase agreements, new earnest money , verification of source of new funds, run new OFAC checks, create new arms length affidavit. While it would be nice to think otherwise, those validations don't happen same day.

Since my inquiry is so time-sensitive, your last sentence is exactly the info I was looking for. Much appreciated.

I think you got the right answers from people, but just to reiterate....

Lenders consider each contract individually, and most likely they have a 'no assignment' in their addendum somewhere.  They would consider a Buyer swap as a new contract.

You are correct...it is TOTALLY ASININE!!!!  Lenders can be REALLY illogical when it comes to deals, and get caught up in the smallest piece of minutia, but they do it all the time.  This is why they end up foreclosing on a house and taking less than the short sale offer that was in front of them.  They don't care.  Their mortgage insurance will cover their loss, so what do they care?

It should be about the bottom line...the net to Seller (Lender).  Period.  But it isn't.  

Here's a thought....why doesn't current Buyer complete the sale and flip it to new Buyer?

Originally posted by @Cara Lonsdale :

I think you got the right answers from people, but just to reiterate....

Lenders consider each contract individually, and most likely they have a 'no assignment' in their addendum somewhere.  They would consider a Buyer swap as a new contract.

You are correct...it is TOTALLY ASININE!!!!  Lenders can be REALLY illogical when it comes to deals, and get caught up in the smallest piece of minutia, but they do it all the time.  This is why they end up foreclosing on a house and taking less than the short sale offer that was in front of them.  They don't care.  Their mortgage insurance will cover their loss, so what do they care?

It should be about the bottom line...the net to Seller (Lender).  Period.  But it isn't.  

Here's a thought....why doesn't current Buyer complete the sale and flip it to new Buyer?

Ahhhhh...if only what you said was true we'd be in a much better world.

Lenders are relatively logical. Yeah they get caught up in the minutia because the devil is in the details. Just because it makes sense to you doesn't mean it makes sense. It comes down to debits and credits for the most part but there is also the logistical and sometimes conflicting component of investor requirements and 3rd party requirements (MI company, junior lien holder, senior lien holder, GSE, etc.) that at the least, influence the transaction or, can control the transaction beyond the seller's or lender's objectives outright. While it may seem asinine to you, the process has to be consistent throughout the portfolio and, the process is both regulated and enforced by both state and federal regulators....AKA the government. Maybe that's where you get that it's asinine, because the government is involved and if that is the case, I agree with you on that front. 

...and no, that's not why it ends up in foreclosure. Short sales end up in foreclosure for two reasons usually, One is time and the other is because the parties to the transaction either can't or won't comply with the requirements of the shortsale, whatever those requirements may be.

...They don't care? Care about what? A short sale versus a foreclosure? Lenders have a pretty reliable financial model that shows probable outcome based on the input for any particular scenario. The key is the input. If the input is valid, the output will be valid. Garbage in, garbage out. What is there to care about though? Either the deal works for the lender/investor or it doesn't. Either the seller/buyer/agents can or will comply with the short sale requirements or they won't/can't. Caring doesn't have any basis in the transaction. Are lender's empathetic to the situation? Probably not but that's not a bad thing necessarily. Treating each situation (Caring) different is what gets lenders in hot waters with the regulators. Lenders must apply fair lending laws and ensure that they are not subject to any violations of UDAAP when reviewing any lending transaction. Even the most well documented exception in the special treatment of one borrower over another is going to get the lender fined or worse for not applying that same exact treatment to all borrowers.

Finally, "Their mortgage insurance"? Who's mortgage insurance. The borrower's? The lender's? Do you actually think that all of the loans out there have mortgage insurance to cover the lender's loss? As a lender that manages MI claims, I can tell you that, A) not all loans have MI and B) not all loans that do have MI have claims paid out on them after a loss and C) going back to what I said earlier where there is MI, all of the rules and processes and guidelines for a short sale are dictated by the MI issuer and NOT the lender. So, in many cases, it's the insurance issuer not the lender that makes or breaks a short sale.

Originally posted by @Ron S. :
Originally posted by @Cara Lonsdale:

I think you got the right answers from people, but just to reiterate....

Lenders consider each contract individually, and most likely they have a 'no assignment' in their addendum somewhere.  They would consider a Buyer swap as a new contract.

You are correct...it is TOTALLY ASININE!!!!  Lenders can be REALLY illogical when it comes to deals, and get caught up in the smallest piece of minutia, but they do it all the time.  This is why they end up foreclosing on a house and taking less than the short sale offer that was in front of them.  They don't care.  Their mortgage insurance will cover their loss, so what do they care?

It should be about the bottom line...the net to Seller (Lender).  Period.  But it isn't.  

Here's a thought....why doesn't current Buyer complete the sale and flip it to new Buyer?

Ahhhhh...if only what you said was true we'd be in a much better world.

Lenders are relatively logical. Yeah they get caught up in the minutia because the devil is in the details. Just because it makes sense to you doesn't mean it makes sense. It comes down to debits and credits for the most part but there is also the logistical and sometimes conflicting component of investor requirements and 3rd party requirements (MI company, junior lien holder, senior lien holder, GSE, etc.) that at the least, influence the transaction or, can control the transaction beyond the seller's or lender's objectives outright. While it may seem asinine to you, the process has to be consistent throughout the portfolio and, the process is both regulated and enforced by both state and federal regulators....AKA the government. Maybe that's where you get that it's asinine, because the government is involved and if that is the case, I agree with you on that front. 

...and no, that's not why it ends up in foreclosure. Short sales end up in foreclosure for two reasons usually, One is time and the other is because the parties to the transaction either can't or won't comply with the requirements of the shortsale, whatever those requirements may be.

...They don't care? Care about what? A short sale versus a foreclosure? Lenders have a pretty reliable financial model that shows probable outcome based on the input for any particular scenario. The key is the input. If the input is valid, the output will be valid. Garbage in, garbage out. What is there to care about though? Either the deal works for the lender/investor or it doesn't. Either the seller/buyer/agents can or will comply with the short sale requirements or they won't/can't. Caring doesn't have any basis in the transaction. Are lender's empathetic to the situation? Probably not but that's not a bad thing necessarily. Treating each situation (Caring) different is what gets lenders in hot waters with the regulators. Lenders must apply fair lending laws and ensure that they are not subject to any violations of UDAAP when reviewing any lending transaction. Even the most well documented exception in the special treatment of one borrower over another is going to get the lender fined or worse for not applying that same exact treatment to all borrowers.

Finally, "Their mortgage insurance"? Who's mortgage insurance. The borrower's? The lender's? Do you actually think that all of the loans out there have mortgage insurance to cover the lender's loss? As a lender that manages MI claims, I can tell you that, A) not all loans have MI and B) not all loans that do have MI have claims paid out on them after a loss and C) going back to what I said earlier where there is MI, all of the rules and processes and guidelines for a short sale are dictated by the MI issuer and NOT the lender. So, in many cases, it's the insurance issuer not the lender that makes or breaks a short sale.

 Alot of words.... NONE of which are based on real life examples.  So, let me help you understand this broken system of yours Ron....

Example #1.... Client is given a 90 day trustee sale notice.  Borrower contacts the lender to request a loan modification.  Lender requests a packet of info, and submits a needs list.  Borrower completes needs list.  Meanwhile clock ticks down on trustee sale..... Borrower checks in with lender, lender requests more info (updated bank statements, etc), Borrower sends in more info.  Borrower waits.  Day before Trustee sale, Borrower checks in with Lender.  Lender states that it is still in process.  Next day, it goes to Trustee sale.  Same day, Lender calls borrower to tell them they were approved for modification, but needs a LOX for something trivial, which the Borrower was more than happy to provide.  However, the sale had already transpired.  The Borrower lost the home.

Example #2...Short sale where the Buyer's spouse was the Realtor. Lender approved the short sale price and all terms. Inspections were done, closing was eminent. HUD-1 (obviously a few years back when the HUD-1 was used) came out, and lender put a halt to the sale citing that that the Spouse would need to either relinquish the commission, or the Lender would not approve the HUD-1. This example was one that I was thinking of when I stated that lenders get caught up in minutia because the lender was willing to pay a commission, and eventually WOULD pay it, but for whatever reason, they got caught up in the fact that the Buyer was related to the Realtor, even though that was fully disclosed in the contract AND the Buyer was purchasing as a sole and separate, so the Spouse didn't have interest anyway. The property ended up going to trustee sale, garnering a fraction of what the agreed to purchase price for the deal.

I get that you may be sensitive to lender bashing if you are in the finance business.  However, you need to acknowledge that really dumb mistakes are made by lenders on many different levels.  Many times it's for the simple fact that there are too many people touching a file, and it gets lost in the cracks.

However, I can't accept your comments that this is a clean and clear system, or we wouldn't have just had one of the biggest lending and finance crashes in history just recently behind us.  You gotta know your weaknesses.

To be clear, I am not speaking to guidelines. Of course the lender has guidelines that need to be met. So many times when you call your lender, you find out that they are just the servicer. So, getting to the lender/investor and/or adding in any government stips for FHA/VA also comes into play. However, my post was speaking more to the flaws, as evidenced above in the 2 examples given (and I have a ton of these examples) of how lenders get caught up in the minutia, and sometimes that leads to a lesser net to them in the end.

LOL! I'm cracking up. You're a real estate broker (enough said) since 96, and I'm a foreclosure/short sale specialist doing "real life examples" since 91. I do this for a living every day. You do it when your open market transaction dictates it. You took 3 hours of CE classes to learn how to do short sales. I have done them for over 25 years, every day, all day. You go ahead and stick with 2008, i'll work on today's reality.  I won't legitimize your diatribe further by correcting your errant and flawed view of how things work.

Originally posted by @Ron S. :

LOL! I'm cracking up. You're a real estate broker (enough said) since 96, and I'm a foreclosure/short sale specialist doing "real life examples" since 91. I do this for a living every day. You do it when your open market transaction dictates it. You took 3 hours of CE classes to learn how to do short sales. I have done them for over 25 years, every day, all day. You go ahead and stick with 2008, i'll work on today's reality.  I won't legitimize your diatribe further by correcting your errant and flawed view of how things work.

 Oh, I see, you'd rather just invalidate and attack me as a person instead of acknowledging the obvious flaws within the finance industry....and there are plenty.  My experience spans beyond Realtor, but I don't need to justify that to you.  You clearly know everything....only problem is the types of examples I provided happen every day.  If you don't want to acknowledge them, that is your choice, but don't pretend they don't exist.

Any agent familiar with short sales knows an agent can’t receive a commission if they are related to the buyer......SOP Arms Length Affidavit. And, a buyer backs out of a purchase because his spouse can’t receive a 2% or so commission, really?

Originally posted by @Wayne Brooks :

Any agent familiar with short sales knows an agent can’t receive a commission if they are related to the buyer......SOP Arms Length Affidavit. And, a buyer backs out of a purchase because his spouse can’t receive a 2% or so commission, really?

 The Buyer was purchasing as sole and separate.  So the assumption at the time of contract was that the SOP didn't apply as the Spouse had no interest in the property (signed disclaimer deed).   But even if the guidelines still considered this a violation of the Arms Length, the point I was making was that this was ALL disclosed to the lender on the contract, but not disapproved of until the closing.  The lender had over 2 months to bring this to light and didn't.  My point was that these types of issues are flaws in the system.

And yes.  It was a 3% commission on a $400K+ property.  That isn't chump change to alot of people.

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