Mortgage workouts of the day, short-sale edition

By Felix Salmon
February 7, 2012
Prashant Gopal has an intriguing story today on the way in which banks are not only doing more short sales than they used to, but are even throwing in cash sweeteners to speed things along.

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Prashant Gopal has an intriguing story today on the way in which banks are not only doing more short sales than they used to, but are even throwing in cash sweeteners to speed things along. Why would they be doing such a thing? The banks aren’t saying, but theories abound:

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…

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.

It certainly rings true that banks are more likely to take losses on a loan when they purchased that loan at a discount. We saw that with principal reductions, last year, and it’s no surprise that it might be moving into short sales too.

More generally, it makes sense that once a homeowner has been living in their home for a year or more without making any kind of rent or mortgage payments, they start getting quite comfortable with that lifestyle, and become rather difficult to dislodge. Cash incentives can work much better than lawsuits, especially when there are title problems.

Frankly, the banks brought this on themselves. It’s well known in mortgage-servicing circles that the faster you move, when a mortgage goes into default, the more money you can save. But too many banks have let far too many mortgages fester in default for far too long — which means that all too many of them are all but worthless at this point.

What the banks should have done, when these mortgages went into default, was work with the homeowners, giving them a menu of options. Would you like to do a short sale? Would you like a modification, with lower monthly payments? Would you like some kind of principal reduction? Would you even be interested in some kind of deal where you sell your house and then get to rent it back from the new owner?

Instead, the banks did nothing, rebuffed attempts from homeowners to contact them and work something out, and generally said no to innovative ideas. Leaving them much worse off, and forced to resort to actions like this:

JPMorgan gave one Phoenix homeowner $20,000 after she sold her property in June for $32,000, according to Royce Hauger, the real estate agent who represented the seller and shared a copy of the settlement sheet with Bloomberg News. The bank also agreed to forgive more than $70,000 in debt, she said.

As such deals continue, and the homes then get dumped onto the market at any price, they will only serve to further depress the US housing market more generally. What’s more, they’ll act as an incentive for homeowners to stop paying their mortgage and start holding out for a big check in return for leaving their homes quietly. The whole thing is an unholy and unnecessary mess. Although I’m shedding no tears at all for the banks, who are admittedly the biggest losers.


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It also would help if our legal system functioned well so that the time to foreclose on a home doesn’t rival or exceed the time required for a complex Chapter 11 reorg. From the same Bloomberg article – “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.”

And, as for Felix’s idea of offering homeowners a modification or principal reduction as soon as they default, I can’t see how that incentive works once it’s widely known that missing 1 or 2 mortgage payments results in a principal reduction. He acknowledges in the last paragraph that the incentive of a big check is likely to be a problem, and the same issue applies to principal reductions.

Posted by realist50 | Report as abusive

Short sales (as long as they are arms length transactions) could be the fastest/best way out of this mess, so any increase is a good thing.

Waiting for the courts to get though all the foreclosures will take forever (mostly due to the banks and their incompetent and/or intentionally negligent document transfer and recording… MERS)

Short sales get underwater owners out, and get a new owner who would like to be in the house in. The old owner looses any paid in principal and down payment, and the bank takes a loss on the portion of the loan that is underwater. That is a pretty fair way to split the loss, especially considering the cost of foreclosure (in time and money). Plus, if the bank wasn’t smart enough to take a down payment, then they loose extra… poetic justice, no?

How about a law that forces banks to accept any offer of a short sale on loans made before 2008 as long as it’s an arms length transaction?

Posted by FinanceChicken | Report as abusive

The waters have become muddied now that banks service 1st liens they don’t own and have second liens that aren’t part of the discussion and left whole. It’s not clear the banks are acting ethically and are potentially conflicted.

Posted by Sechel | Report as abusive

This is why it will be 2016 before housing gets back to positive growth in the boommainia areas. What a disaster – - banks write mortgage values down to zero, then negotiate up. So, I guess, the money they take in will be all profit.

So look for JP Morgan to start having record quarters, based on all the money they are making on mortgages that they are now subsidizing the demise of.

Whoo-hooo-piiee! I love bank-subsidy accounting!

Posted by sagreer70 | Report as abusive