The Solution: Short Sales

Yesterday, we discussed that we are faced with the prospect of having millions of homes going to foreclosure in the next two years. This could have devastating effects on the economy and the future values of residential property in this country.

Foreclosures impact our neighbors and neighborhoods in many ways.

They force families out of their homes. And in many cases these families have nowhere to go. The New York Times has reported that ten percent of the homeless in this country are a direct result of a foreclosure. They also have reported that children are being impacted:

While current national data is not available, the number of schoolchildren in homeless families appears to have risen by 75 percent to 100 percent in many districts over the last two years, according to Barbara Duffield, policy director of the National Association for the Education of Homeless Children and Youth, an advocacy group.

Foreclosures decrease the value of other homes in the neighborhood. No one wants a vacant home on their block as we know that it can create problems for the homes that surround it.

What is the answer? I believe the ‘short sale’ process is the answer.

What is a Short Sale?

A short sale is a workout program that allows a borrower to sell the property, even if the proceeds are less than the loan payoff, due to low property value. If approved, a Short Sale option can help you avoid further collection activity or foreclosure action.

For homeowners, a short sale provides a more dignified transition than a foreclosure as they can time the closing of the sale to coincide with their relocation instead of being evicted by the sheriff.

It will also allow them to return to homeownership sooner. Fannie Mae, for instance, requires at least a five-year wait after a foreclosure but only two years after a short sale.

Short sales are also better for the neighborhood. The home stays occupied instead of becoming a vacant foreclosure that may attract crime.

Plus, a bank loses about 50% on a foreclosed house while only losing 30% on a ‘short sale’. This means that values of surrounding homes won’t be affected as dramatically as they would in the case of a foreclosure.

You may be asking: “Then why haven’t more ‘short sales’ been done?”

That is a great question. It seems that the service companies making the decision as to whether a home should go to foreclosure or be sold as a ‘short sale’ were receiving higher fees if they foreclosed on the house.

The National Consumer Law Center revealed this in a recent report. The report stated:

The servicer’s only incentive to favor the short sale is payments by the investor for performing a short sale….Only if those payments are larger…will the servicer’s scales tilt towards a short sale.

The report broke down the fees involved. Here is a table showing the impact on fees (positive or negative) based on the action the servicing company took:

But the good news is that this situation is being corrected. Just this past Monday, the Treasury Department has announced new guidelines to ensure ‘short sales’ will be more readily initiated.

And the banks are following suit.

JP Morgan Chase spokesman Gary Kishner:

We are working on a more proactive approach to short sales by obtaining a listing of our delinquent borrowers who have their property listed for sale and then reaching out to help them sell the property.

Ben Windust, senior vice president of default operations at Wells Fargo:

If we see we have a borrower who listed property, if it’s underwater, we might proactively reach out to them to work with us now on a short sale.

I believe that in 2010 we will see more and more ‘short sales’ in place of many of the projected foreclosures. This will be better for our neighbors who can no longer pay their mortgage. It will also be better for our neighborhoods, real estate values and the economy.

If you or someone you know is struggling with their mortgage payment, please reach out to a professional and make sure you are aware of all your options going forward.

If you are not arrears on your mortgage, how does all this impact the value of your home?

Tomorrow, in our recap, we will address this question.