There is little doubt that this year will see a new record in home foreclosures and evictions, but some are predicting a burst in short sales that could put a dent in the foreclosure rate.
In a short sale, the lender agrees to sell the house at its market value and take all the money in lieu of mortgage payments, even though the market value is less than the amount of the loan. Short sales are traditionally rare just because banks usually try to avoid lending more than the value of a house, but in areas where home values have fallen by more than 25 percent, they may be the only option left for homeowners who are forced to move. Historically, households move about every five years, and the slow economy cannot slow that down forever, even though it means losses for homeowners and lenders. Short sales may be boosted somewhat this year by a federal program that will essentially pay closing costs for qualifying short sales.
But I think banks’ distrust of borrowers will keep the pace of short sales somewhat muted, though it still will surely set a new record. Banks and mortgage investors tend to feel they are being cheated in a short sale, even though the borrower, who also has to spend money to make the short sale happen, walks away with nothing.
With this basic suspicion of short sales, many of the larger banks are telling borrowers that they aren’t willing to discuss a short sale. Of course, every bank has to prefer a short sale to a foreclosure. The bank can save $20,000 in administrative fees, and stands a chance of selling the house sooner and at a higher price. Because of their suspicions, however, some banks won’t discuss a short sale until it is too late for it to be of much help. The borrower may stop making payments and move to a new job in another city, and the bank may still wait for months before agreeing to a short sale. By then, the potential savings that might have come from a short sale have mostly evaporated. The bank, at that point, might as well foreclose.
Eventually, lenders will have to realize that it is to their advantage to move quicker when employment considerations force a borrower to move away. I believe they will at least assign lending specialists to respond immediately to change-of-address letters. Given the current atmosphere in banking, however, I do not expect much movement in that direction this year, at least at the larger banks. Recent history has shown that it can take three quarters of financial results for banks to understand where their financial interests lie, and the foreclosure process itself can take a year. Given that lag, some of the larger could still be pushing back against short sales at the end of next year.
Short sales are good for communities because they reduce the number and duration of home vacancies related to foreclosures. But by moving distressed homes onto the market faster, they add to the downward pressure on home values. Only a further decline in new home construction will allow home prices to stabilize, and that cannot happen as long as home prices remain artificially high.