Foreclosure moratorium means more short sales

This article is by Tom Gordon is Executive Vice President of Business Solutions for DepotPoint, Inc., which brings greater efficiencies and cost savings to mortgage lenders, loan servicers, foreclosure attorneys and REO asset management firms

The national foreclosure moratorium imposed by Fannie Mae and Freddie Mac, major banks such as Citibank and Bank of America, and a host of state governments has created a “breather” for homeowners in default. By working with loan servicers, some homeowners will be able to modify their loan terms and stay in their homes. But many won’t.

Not all borrowers will qualify for modified loans. Lenders are keenly aware of this, as well as the fact that foreclosing on a home is an expensive proposition: It can cost a bank $30,000 to $50,000 to foreclose on a home, plus carrying costs that equate to 1.0% to 1.25% of the value of each home per month. There is little enthusiasm for increasing bank-owned (REO) inventory in markets already saturated with foreclosed homes and falling prices.

As an alternative, lenders have new enthusiasm to ramp up the volume of short sales.

Short sales, as most know, are when the lender allows a distressed property to be sold at a price lower than the homeowner’s mortgage indebtedness, with the difference forgiven. This relieves the homeowner of their ownership and debt burden without marring their credit report the way a foreclosure would. It also typically allows the new purchaser to buy into the neighborhood at a substantial discount … much more in line with the property’s true, current market value. In other words, short sales facilitate efficient clearing of the market.

Historically, short sales have not been very appealing to lenders. The short sale is a complex process that requires an agreement by all the lien holders to accept the lesser amount owed by the original borrower. The paperwork and number of players involved in short-sale transactions can easily overburden a servicer who is already dealing with hundreds of thousands of loan modifications, REO dispositions, etc.

But now with over four million new loans in default in this cycle and six million more expected in early 2009 due to coming interest-rate resets, lenders such as Citibank, Bank of America and Wells Fargo are fired up for short sales.

As they see it, if just 25% of current loans in default could be sold through short sales it would stave off one million foreclosures (good for homeowners) and replace one million nonperforming borrowers with one million performing borrowers (good for lenders).

The industry’s challenge to accomplish this is two-fold: Evaluating their portfolios to determine which homes are well suited for short sales, and processing the high volume of bulk sales.

So lenders are now assessing a distressed borrower’s situation early in the loan modification process, calculating the sensibility of modifying the loan versus offering the property in a short sale or letting it likely roll into foreclosure. In cases where short sales are the best route, lenders are proactively assigning loans in bulk to be put through the short-sale process. (This phenomenon is strangely new to homeowners; in the past it was incumbent on them and their agents to initiate the short-sale process, not the other way around).

12:51 PM - Feb. 21, 2009 - comments {4} - post comment

RE: Foreclosure moratorium means more short sales

This article about the short sales gives me something to look forward.  It has been very difficult in the past year to work short sales. What I understand now is that the banks will be more amenable to carry out the short sales process.  This will be an opportunity for the Realtor to get some sales closed, rather than just work and work with no result.  I hope that this happens.  I do not specialize in short sales, but I am getting past clients' referrals who need the help, and I want to help these families in such a distressful situation.

Alba M. Lopez

Cashin Company Realtors

San Mateo, CA.

 

Alba Lopez - 8:47 PM - Mar. 2, 2009

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RE: Foreclosure moratorium means more short sales

Short sells look to be the only answer to many individual home owners, that have lost their jobs and know there is no other way to keep up with mortgage and taxes.There are still banks in my area that are slow to accept a short sale, even when the home owner has already made up their minds to walk away from their mortgage commitment.

Pam Elliott

CENTURY 21 FIRST GROUP

Sulphur Springs, TX.

Pam Elliott - 12:34 PM - Mar. 5, 2009

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RE: Foreclosure moratorium means more short sales

Thanks for sharing this info post. with us.

Loan Modification - 11:54 PM - Jul. 20, 2009

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RE: Foreclosure moratorium means more short sales

Someone mentioned the taxes.  Let's open that for discussion. Would it not be beneficial to our cities to lower taxes on homes now? Taxes skyrocketed during the little boom that we saw.  The taxes have not been adjusted. It would be better for the entire city if taxes were lowered for homeowners.  Property values may stablize a bit if we can keep homes from being foreclosed on.  Let's think about cutting some city programs.  While these choices may be hard, in the long run it is better for the city. There are times when we have to make choices to cut the extras that are not a necessity. It's great when the money is there but come on!!

Diana Delgado - 11:54 AM - Jul. 31, 2009

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