Toxic Assets – The Ultimate Short Sale
March 23, 2009 by Kristin LaVanway · Leave a Comment
There is a lot of talk in the news these days about toxic assets…but what in the world does that term mean? And why is everyone so worried about them?
Toxic assets are a direct result of the decreasing home values applied to some bad loans. Let’s say the bank loans Joe Homeowner $100,000 to buy a $125,000 house. The house acts as collateral for the loan. If Joe defaults, the bank takes back the house that is worth $25,000 more than the note on the home. Even though they do not want to own real estate, at least it is worth MORE than what was owed to them. But let’s say that Joe’s house starts to devalue and one day, it’s only worth $75,000. Now, if Joe defaults, the bank can still take back the house, but they hold an asset that is worth $25,000 less than the note. Not so good.
Now, let’s take it a step further. Banks circulate these notes in the form of securities. Securities are like a patchwork quilt of mortgages, all chopped up and stuck back together to make them attractive to investors. The sale of these mortgage-backed securities frees up capital so the bank can make more loans. But guess what happens when the mortgage notes behind the securities are worth less than face-value? When the note on Joe’s house, with a face value of $100K is really only worth $75K? No one wants to buy them. So they sit on the shelf and become worth less and less as the home values decline.
There is a lot of speculation about how these toxic assets are affecting the financial and housing markets. Clearly, the flow of money is restricted when no one wants to touch the toxic assets with a 10-foot pole, so the financial markets suffer. And if the banks don’t have the capital to make loans, it’s harder to get a loan. But there are some other affects as well in how short sales and foreclosures are viewed.
Let’s think about that for a minute. When the bank forecloses, the note goes away. Now that bank owns a house. They have realized the loss on the note by foreclosing and they hope to liquify some capital by selling the house. Even if they sell if for less than what was owed, at least they have some cash – which they want – instead of a house – which they do not want. And this situation is evidenced by the rate in which banks are dumping the bank-owned properties on the market. They just want to raise some cash…and fast!
But the short sales take FOREVER because there is still hope for those notes. Hope that the value will increase…and hope that someone, like the federal government, will bail the bank out by buying up some those bad notes, those toxic assets. So the banks are in NO HURRY to sell off certain properties because they would rather postpone the loss hoping that it might look brighter down the road. It’s a gamble on their part – time will tell if it pays off. And to further complicate matters, for each short sale, the bank has to extract the particular note in question from the patchwork quilt that is the mortgage-backed security. It’s just a big mess.
After working with several short sale sellers, after going through the process of marking down the price of the home, these toxic assets remind me of the ultimate short sale. A short sale is a transaction that occurs when the property is worth less than is owed. Toxic assets are the other side of that coin – a note that is worth more than the home that backs it. And we can all watch as the banks share the same pain and suffering that so many of their customers have felt lately.
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I am a Realtor in Gilbert, AZ, working with clients throughout the Phoenix Metro area. I am lucky to love what I do and appreciate the difference I can make in people's lives.
In a previous life, I was a rocket scientist - really! - but decided to step away from corporate America to be a Mom to my four boys. Found it hard to do bake sales, so I ran a small independent programming business instead.
Flash forward...I am now a single mom and I face many, many challenges everyday. I am living through the hardships that many are facing in this economy. These experiences have motivated me to help other people in my shoes.
I have teamed up with Dean Ouellette to form the East Valley Team - the best darn team in the Valley. Check out our site at http://www.EastValleyTeam.com. I spend way too much time on YouTube - check ou tmy channel at http://www.youtube.com/klavanway
