A baffling Mortgage loan situation
Today a business client told me this story about his mortgage loan. I will make up some numbers to illustrate the situation.
He has a mortgage of $200,000 on a home that is valued at $175,000. His payments are current with on the mortgage. He wants to sell the home in order to move to a different location closer to schools and work. He has the house on the market but will not get enough to payoff the mortgage so he contacted Wells Fargo who holds the mortgage.
They told him he has two options, either pay off the mortgage in full or do a short sale and they will take a discount for the $25,000. He really wants to pay off the whole liability but cannot come up with the shortfall so asked if he could sign a note for the difference and pay it off over time which he can do given his income. He was told they would not do that so I called WFC myself and got confirmation of that.
My concern is that of a shareholder of WFC. I have been in corporate finance for many years but have not been involved in personal loans much at all. It appears to me that if WFC is going to accept a short payment they will charge of the shortfall and forget it. They told me they would not take any notes from anyone for the shortfall because if the customer filed bankruptcy they would not get the money. My argument was, what difference does it make? Would you rather charge off the difference than take a chance on a recovery over time? The latter makes a lot of sense to me as the best solution to this problem. WFC has a lot of these problems, why wouldn’t they just charge off the shortfall, take a note for it and when any payments come in simply apply them to their reserves? Isn’t this a no brainer?
