We have all heard and read about the high cost of foreclosure vs. perhaps short sales or deeds in lieu, but do you ever stop to consider the other costs involved that no one is talking about?
In most every foreclosure outsale case that I have been involved in there have been past due bills which need to be paid by the seller at or in advance of closing. Some of these bills are moderate, less than say $100.00 and then we have the other end of the spectrum, bills in the severals of thousands of dollars.
All of the bills in question should have been paid by the servicing lender as part of their servicing agreement, but more and more often I am finding that NO BILLS are being paid in advance of the property being sold to a third party, other than those that may be necessary to enable the recording of the Trustee's Deed.
A particularly frequent occurance of late is the failure of the servicing lender to pay open water bills (liens on property in Maryland) front foot benefits, real estate taxes, HOA bills and ground rent bills.
In one particularly stunning example of the added cost to the public which was not recouped by the seller in their out sale was a bill for front foot benefits which bill started out at $700.00 when the property first fell into default. For those unfamiliar with this term a front foot benefit is a fee that is charged to the homeowner for “construction & installation of water & sewer systems” that are connected to the home. These fees are not part of the annual real property tax bill but rather are paid annually to a third party collection agent for a term of usually 30 years from date of installation. These fees run with the land.
Had the servicing lender paid the bills annually throughout the long and drawn out pre and post foreclosure process they would have paid at most $1400.00, but, because they ignored the bills when the time came to actually convey the property to the third party purchaser, the bill, which now included the cost of filing suit to collect, attorney's fees, late fees, interest etc. totaled in excess of $10,000.00
As is almost always the case these days I was working through a default management company who was representing the seller. This default management firm is tasked with getting the property sold on the open market. Their job includes marketing (through Realtor assignments), management of the property and review and acceptance of offers to purchase. The default management company has no information relating to what, if any, open bills need to be paid by the seller at the time of the conveyance to the third party purchaser. So, the default management firm accepted a contract of sale, based, I assume, on a figure the seller had defined as their minimum gross.
It would seem reasonable to assume that the seller had tasked their closing agent with determining, in advance of marketing, which, if any, bills would need to paid as part of the outsale thus allowing the seller to determine an acceptable minimum gross sales price to cover their total cost of carrying the property, including open taxes, water bills, etc. Evidently, we should not make such assumptions.
In more and more instances I find that neither the seller nor their assigned title/closing agent have taken the steps to determine, in advance, whether or not there are miscellaneous bills that need to be paid as part of the sale transaction. They wait instead until a contract of sale is accepted and THEN they learn what open bills must be paid. In the case at hand I was handling the transfer on behalf of the buyer and the seller's title agent had no idea that this bill was outstanding until I brought it to their attention. At the time of the actual closing this seller had to PAY $3700.00 at closing to enable the transaction to proceed.
The note holder on this property was a "too big to fail" Bank. Is it any wonder, given this failure to properly service the property that these banks needed a hand out in the first place.
Would it not make better sense to pay the fees when due this eliminating late fees, interest penalties, litigation costs, attorney's fees etc.? Do you think that those who are footing these bills; ie: the taxpayers, have any idea how the bail out funds are being used?
I for one am becoming increasingly frustrated with the way in which these servicing lenders are spending money on fees that should never have been allowed to be assessed IF the servicing lenders had actually serviced the loans by paying the taxes, etc. when due rather than waiting for the property to go to sale on the open market.
So, the next time you hear that a "Too Big to Fail" or a GSE is looking for more money from the Federal Government remember that at least some of those monies were spent to cover fees that never should have been allowed to accrue.