Short Sales Grow As A Cheaper Alternative To Foreclosure
The longer unemployment continues to be a struggle increases the chance of those homeowners not being able to pay their mortgage payments. With many still struggling, solutions to try and avoid the harshest of consequences are continuing to develop work-around solutions everyday, such as strategic defaults.
The unkept secret has been that banks would like to avoid foreclosure at all possible costs as it can be more costly for both parties involved. With foreclosures on the rise, more and more banks/lenders are leaning towards short sales.
Short sales are when the lender agrees to let a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn’t worth what the owner paid for it. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale.
Lenders, which can withhold approval of a short sale if they don’t like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.
But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.
Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation’s largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.
Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.
Late last year, the Obama administration added incentives to get short sales done if a borrower is unable to qualify for a modified mortgage as part of the government’s $75-billion effort to help troubled homeowners. Starting in April, the government will pay incentives to lenders and borrowers when a sale is completed.
Many economists view short sales as a way to address a problem that mortgage relief hasn’t fixed: properties that are “under water,” carrying more debt than the home is worth.
“Making short sales easier would go a long way to freeing up the market,” said Richard Green, director of the Lusk Center for Real Estate. “Right now, if people are under water on their house, they are really stuck.”
While short sales seem like a simple solution, those with a second mortgage can prove to be faced with a more difficult challenge as different lenders tend to have a hard time cooperating.
To learn more about short sales, consider finding a local mortgage broker that specializes in these type of transactions.
Source – LA Times
Tags: foreclosure, second mortgage, short sales, unemployment
