General Question

Jaxk's avatar

What do you think of giving Property owners the 'Right of First Refusal'?

Asked by Jaxk (10085 points ) November 12th, 2011

Lending institutions sell their loans all the time. You may get a loan from one company and shortly find out it was sold to someone else to service it. Usually this would have little impact on either the seller (they made thier money on the loan origination fees or closing costs) and the loan value sold is approx. the value of the loan. But when a bank fails, those assets are sold for a fraction of the value (as low as 10 cents on the dollar). Should you as a property owner have the ‘Right of First Refusal’ to purchase your loan at the discounted price. For instance if you have a $300,000 loan being sold for 10 cents on the dollar, should you be able to purchase your loan for $30,000?

We have had a lot of bank failures over the past 3 years and the surviving banks have been making a killing on buying up those assets. When Country Wide was bought by BoA they paid about 10cents on the dollar so actually purchased the $300K loan for $30K. Since they got that loan so cheap, even if they foreclose and sell it for $100K they make $70K on that transaction. A quick and easy profit for them and pushing property values even lower in the process. They have no incentive to either work with you on the loan or hold out for a decent price for the property.

This whole idea needs a lot of thought and there are many pitfalls if not done properly. But it may provide a way for property owners to have more control of their own destiny. Give me your thoughts or suggestions. Maybe we can hash out a way for this to work. Or may be just trash the whole idea. It’s a work in progress.

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20 Answers

marinelife's avatar

It is an interesting idea.

laureth's avatar

When I saw this idea on another question, I thought it was pretty nifty. And then I chatted about it with a pal who’s a lawyer, and he had a couple valid points that I think are worth considering.

“A third party bank is not privy to the contract like the Mortgagor and Mortgagee are. The Mortgagee isn’t breaching the contract by assigning the contract to another servicer. The Mortgagor would be breaching the contract they signed by paying less than what they promised to pay.

“Someone who buys the contract cannot change the terms. The rights and responsibilities of the bank are being assigned to someone else, a third party. The second party cannot assign their rights and responsibilities to the first party, that is just rescission of the contract (The borrower must pay themselves, the borrower is responsible for paying insurance and taxes out of an escrow account from the payments that they made to themselves, etc.)

“The only way the contract can be changed is if the changes are supported by additional consideration on both sides.

“If you give the borrower a chance to buy out their contract, you’re undermining the basis of all business law. It’s a dangerous precedent. The difficulties of the bank have no effect on the duties of the mortgagor.

“The current market value of a mortgage is always lower than its long-term value. Mortgages are always sold at a discount because of the risk involved with the loan, the effect of inflation, and the time value of money. With a law like that, one could argue that any time the mortgage is bought or sold the borrower should be able to pay it off at that price, leading to new mortgages at the lower value just to take advantage of the sale price. Trust me, something like that would be abused so heavily that it’s a really bad idea.”

Please note that this is not in any way to be considered legal advice.

Jaxk's avatar

@laureth

I’m not sure the problems are quite as bad as you suggest. The Right of First Refusal (RoFR) is not a new concept and is used in real estate dealings already. The right to buy the mortgage is not altering the mortgage in any way. Of course once you own your own contract, you can choose to forgive the loan. When lending institutes sell your mortgage on a normal transaction, the mortgage is typically sold for the principle value (or very close to it). The seller gets the closing costs and the buyer gets the interest. Truth is you could already buy it out at the principle value. It’s only when a bank fails that the assets go through a ‘Fire Sale’ where the value of the loan goes through a dramatic discount. A fee for the transaction (maybe 5–10%) would cover any normal contract sale, leaving only the dramatic discounts to deal with. I see no conflict with either contract law or business law although I would be happy to hear from any legal authority as to where the conflict might arise.

Where I do see a problem is in the bundling. Since the buyer of the assets is not evaluating the individual loans but rather offering a discounted price to cover the losers as well as the winners, allowing the individuals to pit out the winners will affect the bid. I’m hoping that the transaction fee can mitigate this problem. There are also tax implications that I haven’t thought through as yet.

laureth's avatar

The impression that I got from the conversation is that it’s not legally possible to be both parties on your own contract. It would be a bit like signing both halves of a marriage certificate and saying that since you married yourself, you get to claim the marriage tax deduction. ;)

JLeslie's avatar

An Interesting reply from a friend of mine who worked in banking and loans.

If a bank fails, the government (FDIC) is on the hook for paying off all the depositors. Obviously the government wants to avoid that, so they look for a bank that will buy the failed bank. The acquiring bank is getting handed the failed bank’s deposit accounts which are liabilities. They obviously aren’t getting enough cash to cover the deposits (or the bank wouldn’t have failed), but they get other assets of value such as loans and investments. So they may pay a lot less than the assets are worth, but they also assume the liability of paying the depositors. I don’t know if this is ever the case, but I can imagine a scenario where the FDIC would have to pay a bank to take over the failed bank. This would be if the assets were insufficient to cover the liabilities. Now, for short sales. Let’s keep in mind that is isn’t the bank’s fault that your house is now worth less than you paid for it. The bank would really like for you to do what you said you were going to do which is to make your monthly payment. If you don’t, the bank is going to do what it can to lose as little money as possible. Foreclosure usually leads to the greatest loss, so often a short sale is the best way. But selling it back to the owner is really just forgiving part of the owner’s loan. If that became the norm, wouldn’t that encourage everyone who was underwater to just quit making payments and work out a short sale? And don’t forget, when I say “bank” in discussing short sales, you have to realize that the bank probably doesn’t own the loan anyway and can’t do anything without the approval of the loan owner, usually Fannie or Freddie. And I think we have recent evidence of who pays the bill when they lose money. So we’re talking about the people who are making payments and paying taxes covering the loss for those who are getting a short sale. Do you really want to encourage that?

But, I was thinking about this outside of bank failures also. When property goes into shortsale or foreclosure the buyer must be at arms length. Meaning the person who currently owns the house who is defaulting on the loan cannot buy the house at the cheaper price, and neither can a close relative. So, he loses the $300k house and the next person living in it owns it at $180k. Kind of sucks, especially if the first owner can afford the payments on a $180k loan.

HungryGuy's avatar

I think the OP has a wonderful idea! This idea should become law!

OTOH (on the other hand), I forget who, but someone else here recently asked a question something like why do regular people hate rich people. Consider the following sentiments:

“If you give the borrower a chance to buy out their contract, you’re undermining the basis of all business law. It’s a dangerous precedent. The difficulties of the bank have no effect on the duties of the mortgagor.”

“When property goes into shortsale or foreclosure the buyer must be at arms length. Meaning the person who currently owns the house who is defaulting on the loan cannot buy the house at the cheaper price, and neither can a close relative. So, he loses the $300k house and the next person living in it owns it at $180k. Kind of sucks, especially if the first owner can afford the payments on a $180k loan.”

There’s the answer: sentiments like the above are pretty much why ordinary people (especially those who are forced out onto the street while perfectly good houses are left vacant) hate rich people!

BTW (by the way), please don’t construe this as a criticism or attack of the people who posted the above quotes. I know you’re just explaining why things are the way they are. I’m criticizing the ideas expressed, not any person here.

laureth's avatar

@JLeslie – In my state, if my $300,000 house goes into foreclosure and is sold to the next guy for only $180K, I still have to make up the $120K difference.

@HungryGuy – I understand you have no malice toward my friend personally, but I assure you he’s not rich. He merely has the advantage of a law school degree, the loans for which he’s still working off, and not as a lawyer.

JLeslie's avatar

@laureth As far as I know the banks are not pursuing the difference in short sales and foreclosures, you might be thinking of someone who just sells their house for less than their mortgage? Not sure if the fed is taxing people on it, or if laws were changed?

laureth's avatar

@JLeslie – Laws vary by state. My state is one that holds the borrower responsible for the whole amount, over and above the short sale.

Our mortgage is underwater and we want to move. It’s a matter of some interest for us.

JLeslie's avatar

@laureth That is confusing to me. The short sale is the bank agreeing to take a lessor amount I thought?

Jaxk's avatar

I think we’re mixing apples and oranges here. A short Sale is an entirely different animal than selling the mortgage. A mortgage is a piece of property just like any other. It has value and can be bought and sold. A short sale is an agreement to sell the real estate for less than the mortgage to either pay it down or pay it off. I don’t see any connection between the two.

Providing the FRoR would not prompt people to stop paying their mortgage since it would do them no good. The FRoR only pertains if your mortgage is sold to someone else and bad credit would be a problem if you wanted to get the money to buy the mortgage yourself. Also the whole thing is easy to resolve since by missing your payment, you have already breached the agreement. Foreclosure is the result and a breach of agreement could easily void the FRoR.

The reason you can’t bid on your own short sale is to keep people from defaulting just to manipulate their mortgage value. With a FRoR, the property owner has no way to make the bank sell thier mortgage. They are in fact bystanders in that event.

Last point. When a bank fails and the assets are sold for pennies on the dollar, the only difference will be whether the purchaser of those assets are another bank or the property owner. The amount of money lost by the failing bank is the same and the amount of money made in profit from the purchasing bank or the property owner is the same. The only difference is who gets the profit, another bank or the property owner. You choose.

laureth's avatar

@Jaxk – I understand the difference between a short sale and what you’re suggesting. Conversation drifted a bit there.

@JLeslie – Not in my state. YMMV.

Judi's avatar

What a great idea @Jaxk. Would you consider running dolor president?~

Judi's avatar

@Laureth, do you live in Nevada? I have friends who were builders and near retirement when everything went to pot in Las Vegas. They lost everything and the bank seized all their other assets.

HungryGuy's avatar

@Judi – Yes! @Jaxk for President with this idea!!!!

JLeslie's avatar

@laureth But, are they actually going after the difference? In most states I think that is the law, but banks aren’t pursuing the money.

laureth's avatar

@JLeslie – Mr. Laureth, who has been doing the research on this for us, says, “Enforcement seems almost random, from what I can tell, which may mean that someone is making the decision based on how much attorney time it would cost in each situation.”

It’s enough of a threat, though, that we don’t want to just take a strategic foreclosure, because we could be on the hook for more than we want to deal with all in one bite.

JLeslie's avatar

@laureth I wasn’t recommending a strategic foreclosure. I don’t think you thought I was, but I thought I would write it to be sure. Also, a friend of mine wrote this morning on the topic, and some banks are getting good pay out on PMI since so many of the loans were 100% loans or <20% anyway, so they get insurance money and then what they sell the property for.

laureth's avatar

I didn’t think you were suggesting it, although it’s something that some people do suggest for us.

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