In Mirage Mills, we’ve seen it all when it comes to the housing mess. Entire neighborhoods are so run down you would think Home Depot went out of business. Our kids think “bank owned” is an invitation to invite their friends to a weekend blow-out and trash a vacated house. The black market in copper stripped from hot water pipes and gutters is a major source of local employment. They don’t call my town the Chernobyl of American real estate for nothing.
So it’s no surprise that Mirage Mills was the birthplace of the short sale. Back then, we didn’t call it a short sale. We called it the Big Loser.
The Big Loser was the brain child of Ernest S. Crowe, the smartest mortgage guy in town. His friend, Ziggy Callamitti, was farther underwater than Jacques Cousteau in a National Geographic special. The monthly payments were killing him, so Ziggy decided to walk away from his home and mail the keys to the bank. Today they call that a “strategic default.” In those days we called it being a bum.
Ernest had a better idea. “Your bank will lose a ton of money if they foreclose on you. It will take them years to sell your house. I’ll ask them if they would consider forgiving, say, ten percent of your principal and refinance you at today’s rates. Then you would be able to afford your monthly payments. “
“Why would they ever do that?” asked Ziggy. “They don’t care if I lose my shirt. Ernest, these are the same people that sold me a loan they knew darn well I could never afford.”
“You have to think like a banker,” said Ernest with a knowing smile. “Bankers aren’t stupid.”
Well, Ernest was wrong. The bankers laughed at him. “Ten percent? Get outta here. I guess you would like to us to lower our profits ten percent, cut our dividends ten percent and get Christmas bonuses ten percent smaller than last year?”
“But you will lose a lot more if he walks,” said Ernest.
“You guys live in the Chernobyl of American real estate. You’re all bottom feeders. One guy gets ten percent, everybody else is gonna want ten percent. No, we need to make an example of deadbeats like your client. Tell him to go ahead and walk. We’ll torch his credit for the next 40 years,” said the bankers.
“Ernest, your problem is you don’t think like a banker,” said Ziggy when Ernest recounted his conversation. “And I mean that as a compliment.”
So Ziggy quit paying his mortgage like almost everybody else in Mirage Mills and waited. When the bank replaced the daily robo calls with very nasty real people threatening to foreclose, he decided to act first and not give them the pleasure.
The U-Haul in his driveway was nearly packed when Ernest called. “Congress just passed this thing called the homebuyer tax credit. Prices are going to go up.”
“So let’s go ahead, find a buyer for your house now and get out of this whole mess. Do the bank a favor and save them some money. They’ll do much better than they would if they foreclose. You’ll take a credit hit, but at least you’ll be free and you can more on. It’s as close to a win-win as we’re gonna get.”
Ziggy reluctantly agreed and his real estate agent managed to find a young couple who had just heard about the tax credit. They put a contract on the house before it was listed. When Ernest called the bank, he discovered they had brought in a new manager because the old one had lost so much money. The new manager didn’t think like a banker, either. He listened when Ernest explained how they would do better by going ahead with the sale and agreed to jump through hoops with his bosses to make it happen.
They say that things happen for a reason and maybe the world wasn’t quite ready for the first short sale. The financing fell through for the young couple. It took another whole year to sell Ziggy’s house, for a lot less. By then the tax credit deal was over and prices in Mirage Mills plummeted once again. The bank lost $20,000 more than they expected on Ziggy’s house but the new manager stuck it out until the deal was done.
Instead of a win-win, it was actually a lose-lose . But it could have been a lot worse for everyone concerned, so that’s why we called it the Big Loser instead of the Biggest Loser, like the TV show about fat people. Ziggy lost his house and he couldn’t get a credit card for years, but he got to live in his house for free and saved enough to make some great stock investments. The bank lost a bundle, but they still did better than they would have had the house gone into foreclosure. Most importantly, the managers got their full Christmas bonuses every year. Ziggy’s real estate agent worked ten times harder than she would have for a normal sale, but she wrote a hugely successful training course based on what she learned and became the Mirage Mills Realtor of the Year. Poor Ernest, who thought the whole thing up in the first place, was the biggest loser. He didn’t make a dime.
Never did we think the Big Loser would become such a big deal. Now they call it a short sale, even though there’s nothing short about it. I guess that’s how it goes in the whacky world of real estate where words mean just the opposite of what you would think, like down payments that never go down and closing costs that aren’t the end at all but just the beginning of what your home is going to cost you.