by vain follow (0)
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I see a short sale no different than a retail store owner not happy about a customer returning an item.
Bottom line for the performance of this loan is $644200; which is $27,200 more than the original loan amount.
Assuming those numbers, this would probably not be a profitable overall transaction. If you run the numbers, that's equivalent to about a 1% compounded rate of return on the $617K loan.
But you have to look at the other side of it's balance sheet. What was it's weighted interest payed out on it's liabilities (deposts, CDs, bondholders)? And how much did it pay out as dividends to stockholders? What about other overhead like employee compensation?
It's extremely unlikely their average rate of payment on their liabilities was lower than 1% over that period. For example in the 2005 annual report for Wells Fargo, their average interest paid was 1.95% on their liabilities. Though newly issued liabilities were probably lower than that, so hard to know for sure. So it's already likely they took a loss just from the interest rate spread.
Add in the other expenses and the loan was very likely a loser for the bank.
This example does demonstrate however how short sales are not quite as catastrophic to banks as one might imagine.
There are two ways to look at it. If the bank had borrowed money from other bank/govt. than they are loosing on short sale. If the bank is self sufficient with no borrowing than they did not make enough profit.
There is no such thing as a bank that does not borrow. If you're just a doing mortgage lending with your own capital, you're an investor, not a bank.
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I was told by my loan officer during a casual conversation while waiting on my short-sale approval. Here are the details.
Original loan of 617k in 2004 @ ~5% 5/1 ARM
Buyer defaults in late 2009.
Market value of the home is probably $480k
I offered $430k.
Existing loan balance is still probably around $617k because of the suicide loan.
I was worried that the bank may not want to take a hit because of this short sale. He assured me that the bank is not taking a loss. The question is not how much they will lose. It is how greedy do they want to be.
He summarized his basis for that statement:
The borrower has made payments for 5 years already at about $4000/month. That's $48k/year x 5 years = $240k went to the bank.
Now if they get $430k - 6% commission, it would net them $404200.
Now add that to the $240k that they've collected from the previous 5 years.
Bottom line for the performance of this loan is $644200; which is $27,200 more than the original loan amount. The interest gets excluded from the calculation because he assumed the bank was able to secure those funds for a very minimal cost anyways. Even if it was not minimal, it's not as much loss one had expected.
Has anyone ever heard of this?