Short Sale Tip # 5: The Role of Loss Severity In Short Sales
Do you speak “banker-ese”? If not, you are leaving HUGE amounts of money on the closing table! When performing a short sale you have to be sure that you are negotiating from a position of strength. Do you know what Loss Severity is?
Continuing our Short Sale Tip, have you ever heard of the term Loss Severity? If not, roll up your sleeves, get a cup of coffee and snuggle up to some banker talk. Loss Severity is the technical term for the bank’s internal auditing and
calculations to determine how bad they are going to get hit on a foreclosure.
Loss Severity is the rate of loss on a liquidated mortgage and is defined as follows:
the outstanding principal on the mortgage loan – the realized loss over
the outstanding principal on the mortgage loanFor example, let’s say Mr. Smith owes the bank $300,000.00 and if the bank forecloses on Mr. Smith and eventually gets a judgment for fees, unpaid interest, and legal costs now the bank is owed $315,000.00.
The bank then sells the REO property for $265,000.00. On that sale of $265,000.00 the bank had commissions and holding costs, maintenance costs, closing costs, and taxes and they actually only netted about $240,000.00.
Then the bank would have realized a loss of $75,000.00. ($315,000.00-$240,000.00). Based upon this scenario, the Loss Severity Rate would be about 25%.
Lately, this would be a GOOD deal for most banks. Data obtained from from LoanPerformance Inc. indicates that the national average of the severity of losses for mortgage holders on foreclosed properties is peaking around 30-40%.
How bad is it, New Hampshire which is never mentioned in foreclosure discussions is one of the best in keeping foreclosures to a minimum and their Loss Severity rate is approximately 29%!
Are you ready for the big ending…the average national Loss Severity rate is 41%. Please understand..this actually means that for every $100,000.00 that banks are lending out, if the property goes into foreclosure they can only expect to recover on average about 60-70%…that’s amazing!
So do you think the bank wants your client’s home..NO WAY!
The bank does NOT want the house. It wants to be paid off so it can make more money and have more money to lend out and profit from). So now you know the truth. Every agent involved in a short sale needs to understand what is going on in today’s financial market. You are the professional…it’s time to get paid like one…but you need to be educated like one.
