Uncle Sam Promoting Short Sales?

According to Jim Puzzanghera and Alejandro Lazo of the Los Angeles Times, a potential deal is in the works between banks and government officials that would force banks to approve short sales for severely delinquent borrowers.  Additionally, servicers would be required to reduce the amount owed on certain home mortgages.

There are 2 obvious advantages to short sales versus foreclosure.  First, short sales are the more economical approach, both to lenders and to taxpayers.  Why?  Because foreclosures cost lenders legal fees, in addition to the carrying costs after the foreclosure (property maintenance, insurance, etc.).  Also, foreclosures sell for deeper discounts, on average, than short sales, dragging down home values of surrounding properties.  According to RealtyTrac, short sales bring about 85% of market value, compared to only 64% for foreclosures.  Glenn Kelman, CEO of Redman, said it best in the LA Times article:

“Short sales just command a better premium than foreclosures.  It’s like day-old bagels. They never sell for the same price. If they sit there for a while, nobody wants them because houses just break down when they are left alone.”

But the proposed settlement, currently being discussed by federal and state officials and the five largest mortgage servicers (Chase, BofA, Wells Fargo, Citigroup, and Ally) could meet stiff resistance.  One potential provision would be a payment of as much as $20,000 to struggling homeowners, known as “cash for keys,” which could make the cost of the program unrealistic.

 

 

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