The universe operates in a rhythmic fashion. You know the old saying “the more things change, the more they stay the same”. It is certainly the case with how D2 is unfolding in relationship to D1. In previous articles we discussed how in D1, and after the stock market crash of 1929, that the real impacts, such as bank failures didn’t occur until 1932-33. What really precipitated the bank failures and eventually even President Roosevelt declaring a bank holiday was the banks’ assets were crushed with a burden of foreclosed property. At first it was homes and mortgages, but the final burden was commercial real estate assets reverting to the banks’ ownership.
We are now beginning to see the same exact thing happening now. Already in 2010 there have been 857,600 foreclosures recorded. The reality is weighed against nearly 5,000,000 foreclosures in 2009 and at least that same number awaiting in the wings for 2010. The end result of this coupled with tightening credit markets, declining incomes, and reservations by potential buyers is a deflationary effect on the sale price of homes. Already, even in the prime markets, housing values have dropped significantly, averaging 30-40% nation-wide. This is especially true on the higher end properties.
In such a market, people facing foreclosure have a potential to limit their liabilities by SHORT SELLING the property. However, short selling requires the co-operation of the buyer, the seller, and the mortgage holder in order to be successful. This becomes really problematic however, when there is a second or even third mortgage involving the property.
The following article, “Short-Sale Program to Pay Homeowners to Sell at a Loss,” first appeared in The New York Times. To summarize some points of the article here is to provide homeowners with some knowledge of what may be available to them. In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave. This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions. More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done. For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.
Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash around. Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”
However, there is great concern because the proposed program is tailor-made for fraud. If short sales are about to have their moment, it has been a long time coming. At the beginning of the foreclosure crisis, lenders shunned short sales. They were not equipped to deal with the labor-intensive process and were suspicious of it. The lenders’ thinking, said the economist Thomas Lawler, went like this: “I lend someone $200,000 to buy a house. Then he says, ‘Look, I have someone willing to pay $150,000 for it; otherwise I think I’m going to default.’ Do I really believe the borrower can’t pay it back? And is $150,000 a reasonable offer for the property?” Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.
Last year, short sales started to increase, although they remain relatively uncommon. Fannie Mae said pre-foreclosure deals on loans in its portfolio more than tripled in 2009, to 36,968. But real estate agents say many lenders still seem to disapprove of short sales. Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.
Major lenders seem to be taking a cautious approach to the new initiative. In many cases, big banks do not actually own the mortgages; they simply administer them and collect payments. J. K. Huey, a Wells Fargo vice president, said a short sale, like a loan modification, would have to meet the requirements of the investor who owns the loan. “This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.”
If you are a homeowner in distress, this may be an option for you, but be informed and be prepared to have to battle to get the best deal possible. If you have second or third mortgages on your home, you may find even the newest assistance will not be available to you. If you can, prior to looking at a short sale, consolidate second or third mortgages with some other debt instrument not tied to your property that may enhance your opportunities to take advantage of this new program without remaining “upside down” after the short sale is completed. Learn as much as you can from your realtor or lender.