Banks Now Prefer Short Sales to Foreclosures

Below are excerpts from a recent article that confirms what we have been saying for about the past 9 months. Last December, just a few months after the ‘ROBO-SIGNING’ scandal really became widely publicized, we saw a noticeable shift in lender attitudes during our short sale negotiations. Lenders were much more open to approving short sales.

If you owe more than your home is worth…now may be the time to contact us about the possibility of doing a short sale. Here’s my direct line: 561-602-1258

 A lender’s interest is in profit, and a foreclosure used to be more lucrative for a bank than a short sale. Now, however, the average foreclosure takes more than 300 days to process; time where no profit is being made on the house, it remains as a negative entry on the bank’s books, and the time and work that goes into the process now costs banks more profit than a short sale – wherein a bank approves the sale by the homeowner for less than the loan amount, losing the difference between the sale price and the loan. . This shortcut is becoming an increasingly more popular option for the nation’s three largest mortgage carriers, Bank of America, JPMorgan Chase and Wells Fargo. 

Banks dealing with lengthy, complicated and frequently messy foreclosures are starting to see "short sales" as a quicker and cheaper way of getting bad loans off their books.

"We think the short sale is a good solution for many struggling homeowners and we let them know that it's an option," said Christine Holevas, spokesperson for JPMorgan in an email. Foreclosure can be an expensive and lengthy process for all parties. It's a good deal for the homeowner and a good deal for us (a cheaper way to get a bad loan off the books.)"

A short sale is seen as a more palatable alternative to foreclosure for borrowers. In its simplest form, borrowers with underwater mortgages sell their homes to a buyer at a price that is approved by the lender. The lender normally forgives the difference between the loan and the sale proceeds- in essence the bank is being shorted for the loan amount.

Previously, lenders were said to prefer foreclosures to short sales because they -- or the investors in the loans -- figured that more money could be made from the former.

But the average time for the foreclosure process- from the time of notice to the completed foreclosure- is now 318 days in the U.S., according to RealtyTrac.

The longer it takes for a foreclosure to be approved, the longer bad loans stay on banks' books. Foreclosures are also more expensive, because of the legal expenses involved as well as the expenses for maintenance and upkeep while the property is in foreclosure.

According to real estate analytics firm CoreLogic, the number of short sales in the market have tripled in the last two years and transactions are anticipated to grow by 25% in 2011. The markets with the largest short sale volume are California, Arizona, Colorado and Florida.

"Lenders often consider short sales as the lesser of two evils when compared to foreclosures," Core Logic noted in a May 2011 report on short sales. "While significant losses may be incurred in both foreclosure and short sale scenarios, the overall negative financial impact of short sales is typically less than that of foreclosure. In many cases short sales represent the best way for lenders to minimize their overall losses. In general, all parties fare better when a foreclosure is prevented."

Still, the short sale process is not easy and industry observers say sellers and buyers of short sale properties must set realistic expectations.

For one, borrowers should realize that their credit scores aren't any less affected under a short sale than it is in the case of a foreclosure. In both case, the borrower is considered in default.

However, in a short sale, the borrower's debt is often forgiven, at least on the first lien. Also, a borrower who does a short sale might be able to apply for another mortgage sooner than he or she could in the case of a foreclosure, where the wait can be as much as 7 years.

And, the more parties involved on the lender side, the more complicated the short sale process is. Investors, junior lien holders and mortgage insurers often want more documentation to prove financial hardship of the seller, proof of funding for the borrower and they may want to negotiate the price.

The short sale process can go a lot more smoothly when the real estate agent is someone who understands how to do a short sale. "This is not a regular sale where there is just one contract between a buyer and a seller,".

This article was republished with permission from The Street.

If you’d like to discuss your short sale options, call me directly at 561-602-1258

Steve Jackson

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