The underlying issues, of course, are liquidity (refinancing money is often not readily or adequately available) and falling property values (to less than the amount of the debt). A convenient rule of thumb is the more out of whack the asking price is to the market value, the greater the likelihood that the borrower and lender are in the “extend and pretend” mode (i.e., the more unrealistic they are).
Interestingly, sometimes it is lenders who prefer to extend and pretend, sometimes it is borrowers, sometimes it is both. Likewise, sometimes it is lenders who prefer a short sale transaction, sometimes borrowers, sometimes both.
Whether a lender and borrower pursue an extend and pretend approach or a short sale depends on a variety of factors: the particularities of the property; the extent of the gap between the property value and the debt; the local market conditions; the pressure on the lender by regulators; the likelihood, speed and contingencies of a sale transaction; the psychology of the parties, and many other factors. What extend and pretend and short sales share in common is that someone is going to lose money, it’s just a question of who, when and how much.
In extend and pretend mode, lenders and borrowers tend to be a bit subdued. They’re embarrassed at their mistakes, but can’t or won’t acknowledge the reality of property values. In short sale transactions, lenders and borrowers tend to be emotional and pugnacious. They’re ready to face reality, but want to get through the pain quickly.
This is a real estate market in which a broker must help clients understand reality and come to terms with it. This is a market in which a real estate broker is part philosopher and part psychologist.
Steven Karbank
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