Short sales are crucial to clearing the post-bubble housing market, but banks typically drag their heels. That's because approving a short sale means accepting - and accounting for - the fact that you're never going to collect what you're ostensibly owed.
In what may be another sign of an incipient recovery, Bloomberg reports that some banks are now embracing short sales in a big way: by paying large incentives to sellers to agree.
Bloomberg's Prashant Gopal writes:
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.
Bloomberg's remarkable report includes some of the predictable hand-wringing over this phenomenon, reminscent of Rick Santelli's famous rant about "losers" that helped give birth to the Tea Party movement:
Offering enough for the homeowner to put down a deposit on a rental apartment is reasonable, said Sean O’Toole, chief executive officer of ForeclosureRadar.com, which tracks sales of foreclosed properties. Giving tens of thousands of dollars to delinquent homeowners sends the wrong message, particularly if they got into trouble by running up home-equity loans during the housing boom, he said.
“It may make sense for people to walk away, it doesn’t make sense for them to get rewarded for doing it,” O’Toole said. “It’s not the homeowner’s fault that house prices dropped so dramatically, but they have already received months of free rent, if not cash out.”
And the story also suggests that the incentivized short sales, which aren't being publicly discussed and seem to come out of the blue as a "tap on the shoulder," may be a way to clear loans with underlying title problems, such the "robo-signed" documents that are a focus of the multistate litigation now in turbulent settlement talks:
[Guy] Cecala of Inside Mortgage Finance said he wonders whether lenders are making big payments on properties with underlying title problems. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Florida, said representatives of a large bank told him the incentives are primarily given to borrowers when it doesn’t have the proper paperwork needed to win its foreclosure case. He declined to name the bank for publication.
But Bloomberg's report may also reflect the underlying economics of the housing bubble, especially a key point that everybody has been trying to sweep under the rug for years: Every bad mortgage was a two-sided transaction. If there wasn't outright fraud on one side or the other - and sometimes there was - today's underwater loan is like every other deal that looks foolish in hindsight.
Homeowners who want to stay in their homes and can afford payments would be much better off with direct principal write-downs, of course, rather than the after-the-fact variety entailed in a short sale. But both sides made bad bets, and the only way the market will clear is when both sides accept the consequences.