WILL YOUR LENDER PAY YOU TO SHORT SALE YOUR HOME?

By Steve Beede.

As reported in DSNews.com, a Massachusetts real estate company, McGeough LaMachia Realtors, conducted a nationwide study which indicated that short sales bring a 24% greater return to lenders than foreclosures. This study by compared sale prices of short sales vs REOs in multiple states including California. The average difference was $43,000! And that likely did not take into consideration the cost of foreclosure including many months more of non-payment plus carrying costs as an REO. It therefore is no surprise that some lenders have actively sought to promote short sales by offering incentives to upside down owners to not just walk away.

 Chase has been offering incentives of up to $35,000; BofA: up to $25,000; Wells Fargo: up to $20,000; and Citibank: up to $12,000. With many more foreclosures likely coming in 2012, these programs may very well expand especially in states like Florida where foreclosures require a legal action in the courts. According to a Chase spokesman: “When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure.”

 According to market analyst Realty Trac, a mountain of pending repossessions is holding back a recovery in the housing market, where prices have fallen for six straight years, and damping economic growth. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth. Short sales represented only 9% of all residential transactions last year with many owners holding out for a Loan Modification or otherwise staying in their property payment free for over a year while their home moves to foreclosure. Lenders are realizing that they can dramatically cut their losses by paying owners to sell the property now.

 Unfortunately, the government agencies which hold at least 60% of the delinquent loans have not gotten the message. FHA offers only $1,500 in incentives. Fannie Mae and Freddie Mac offer incentives up to $3,000 but only through the HAFA program. Perhaps this government resistance to economic logic explains why lenders are returning to profitability while the government languishes in a Budget mess.

 For some commentators however, any such payment is viewed as a reward for defaulting on obligations and sets a precident which might encourage others to also default. While indeed there is a “moral hazard” involved in any perceived bailout – whether it be government helping the banks or anyone helping the homeowners – the reality is that our economic recovery requires that we resolve the housing crisis as soon as possible regardless of whom is to blame.

 From my vantage point, having now advised over 4,000 upside down property owners over the past 3 years, this is not about deadbeat borrowers trying to avoid their debts. Many people still fail to appreciate the impact that this housing crisis has had on upside-down owners. For most, it is not a choice whether to pay or lose their home. Job losses and escalating loan costs have made many loans unaffordable for the average person. Almost all Loan Modification programs including the government’s HAMP program start with a threshhold that people should not be paying more than 31% of their income on their loan. However, a recent study by the Center for Housing Policy indicates that nearly 1/4 of all homeowners are paying over 50% of their income for housing costs. The Report indicates a similar payment ratio for renters.

 With high unemployment and increasing costs for everything from gas to groceries, it is likely that more and more struggling homeowners will lose the battle to keep their homes leaving short sale or foreclosure as their only alternatives. Look for even more Lenders to offer incentives to move these properties faster and reduce their losses. Whether the government agencies will get on board will remain questionable especially in an election year when the granting of any payment to a defaulted borrower will be considered by some to be a waste of taxpayer dollars.

 The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan, especially if youre facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.