Can I Give It Back to the Bank?

You have no idea how many times I’ve been asked this question in the last few months. Countless investors have contracted to buy properties believing they would never have to close the contract, or if they closed the contract, that they could soon flip the property for a profit. The market has stalled, and nothing sells easily; those people who were happy to buy would now be ecstatic to be away from these properties.

What is the effect of foreclosure, and can these properties simply be given back to the bank? Please understand that in framing this question, the word “bank” means mortgage company, lender, developer, bank or whatever other source may have provided funds for the acquisition. The question remains, “Can I just give it back”?

The answer, of course, is no. Those who extol the virtues of a “short sale”, are by and large fooling themselves, and you. If you think a bank will let you sell the asset for less than the total debt and walk away without repaying the bank in full, you are probably wrong.

To make matters far worse, the word “bank” is normally not accurate. The bank is instead a mortgage company somewhere far away that has put all of its mortgages into billion dollar packages that have since been sold to investors. Your mortgage is not even a piece of paper in the hands of an investor. It is digits on an investment sheet that are managed by a servicing company that probably does not possess the actual mortgage documents either. The servicing company does not own or possess the mortgage, it merely services the mortgage documents, which have long since been left behind with the initial lender. The process of matching your actual mortgage documents, (and your personal best interests), with the digits that appear on a computer print-out in Indonesia, or somewhere the investors are located, may be impossible.

(If in fact you are dealing with a real “bank”, a local lender you can reach out and touch, your ability to compromise may be more likely. Sometimes even distant lenders can do that. However the farther away the lender, and the greater the number of mortgagees, the less likely you are to find the human who has authorization to talk about changing your mortgage.)

When the servicing agent’s computer reports that you are in default in your mortgage payments, that computer will talk to a computer in a foreclosure office in South Florida. If you are one of those for whom a mortgage company did the “complete job” when you closed on your overpriced property in 2004 or 2005, you did not put 20% down, but borrowed the top 20% from yet another mortgage company. If that happened, you have two separate servicing agents, two separate ether-world paths of digits between foreign investors and separate Florida foreclosure specialists, and an even more remote chance to “work out” a short sale among mortgage companies, all of whom satisfy their investors only when they insist on getting payment in full.

If the above description sounds like a game of musical chairs where you can’t hear the music, then you got my message. Don’t blame the music though, because there probably weren’t any chairs in room anyway.

The outlook for anyone seeking a rational solution other than foreclosure is bleak. Nevertheless, you should not give up. A qualified attorney might help, but may very well be able to help more when a foreclosure is filed than before. If you or one of your clients is one of the unfortunate investors to whom this article addressed, and if you or your client intends to do all he or she can to minimize the impact of foreclosure, act as soon as the foreclosure is filed, not later. Once a default is entered, you have given up any ability to affect the outcome of a foreclosure.

All of the above makes the outlook for working out problem loans appear more gloomy than I intend. It’s important to be pro-active once you find the right audience, and I have high hope that mortgage companies will come to realize that their best interests are not always different from those of their borrowers.