In a short sale, banks forgive the difference between what is owed and the sale price of the house. Recently, however, banks have started giving cash back to the sellers. So far, the programs are a drop in the bucket. There are millions of pent-up foreclosures and JP Morgan is doing 5,000 short sales a month, hardly enough to make a dent.
Still, “short sales represented 9 percent of all U.S. residential transactions in November, the most recent month for which data is available, up from 2 percent in January 2008, according to Corelogic.”
Please consider Banks Paying Cash to Homeowners to Avoid Foreclosures
Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.
Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.
Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.
Karen Farley hadn’t made a mortgage payment in a year when she got what looked like a form letter from her lender.
“You could sell your home, owe nothing more on your mortgage and get $30,000,” JPMorgan Chase & Co. (JPM) said in the Aug. 17 letter obtained by Bloomberg News.
Tom Kelly, a JPMorgan spokesman, declined to comment on the company’s incentives.
“When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure,” he said in an e-mail.
Lenders spend an average of 348 days to foreclose in the U.S. and an additional 175 days to sell the property, according to RealtyTrac. In New York, a state that requires court approval for repossessions, it takes about four years to foreclose on a home and then resell it, the company said.
Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor who trains brokers and attorneys to negotiate with banks for short sales.
What’s Really Going on Here?
If the answer is “it’s faster, quicker, cheaper” than foreclosures, then why don’t we see more of them, lots more of them?
Could it be these are the real problem loans with clouded titles, questionable practices by lenders, or huge numbers of written complaints by borrowers? Add to that a dearth of willing new borrowers and I think you have the answer.
Reader Bruce comments …
The only solution, is as you have said, to speed up the process. Unfortunately, this begs the question, how much more insolvency can the banks sweep under the carpet?
All the best Mish! fight the good fight!
Not to mention the fact that politicians are against foreclosures and have delayed, at great cost, stepping up the foreclosure process.
Mike “Mish” Shedlock
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