Friday, February 17, 2012

Short Sales vs Foreclosures – Are Bankers Finally Getting Smart

If So, It’s Been a Long Time Coming

How Exactly is This Helping?

The current drag on the U. S. economy is the housing market.  The depression in home prices has cost American families trillions in reductions of their net worth.  The collapse of new construction has cost millions of jobs in the home building industry.  And the huge number of foreclosures has resulted in a large supply of unsold houses, further depressing prices and making it very difficult for the working population to relocate to where there are jobs, because they simply cannot sell their existing residence.

For a long time the answer to the problem by the bankers has been to foreclose.  This is a lose-lose-lose strategy.  Banks lose because they end up with property they have to maintain and support and will ultimately sell at prices far below the loan value.  Homeowners lose because they are thrust into the street and the housing industry loses because it is has a large number of abandoned homes that each month fall into more and more disrepair.

The alternative to all of this is a “short sale”.  In that situation the lender agrees to take the proceeds of a sale of the residence as full consideration of the unpaid loan balance even when those proceeds are less than the loan balance.  This will always be the better financial option. 

For example, a bank may have a $200,000 mortgage on a house that has a market value of $150,000.  The bank can either allow the house to be sold and accept $150,000 or it can foreclose.  If it forecloses it will get less than $150,000 because of the costs of foreclosure and the costs of holding the house for sale are subtracted from the sale price. So why wouldn’t a bank always accept a short sale.

Two reasons.  One is that the bank looks bad in taking $150,000, it has to admit a mistake and no one likes to do that.  The second is that it seems like the bank is letting a deadbeat homeowner get away with something.  Of course that is not the case at all, the homeowner loses all of their equity in the house, and has to find a new place to live.  So the reasons banks do not accept a short sale are not financial; the economics always are in favor of the short sale.

It now appears that lenders are finally catching on and allowing more short sales.

The latest improvement is an upsurge in lenders’ enthusiasm for short sales as an alternative to foreclosures. In a short sale, the lender accepts less than the full amount owed on the mortgage when a house is sold. Short sales are much faster than foreclosures and tend to preserve more of a home’s value. (People who leave voluntarily are less likely to punch holes in the walls and steal the copper wiring.) JPMorgan Chase in some cases offers the exiting homeowners $10,000 to $35,000 in cash at settlement, real estate agents in Arizona, California, Florida, New York, and Washington say. Other banks also offer incentives.

This means that the housing crisis can end that much quicker.  Of course, just think about how much quicker it could end, or how less severe it could have been or even how it could have been avoided if the lending industry had been so stupid in the first place.

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