How Banks Are Using Short Sales
The average foreclosure takes more than 30 days to process and the time and work that goes into the process now costs banks more profit than a short sale – wherein a bank approves the sale by the homeowner for less than the loan amount, losing the difference between the sale price and the loan. Banks dealing with lengthy, complicated, and frequently messy foreclosures are starting to see "short sales" as a quicker, cheaper way of getting bad loans off their books.
The nation's biggest mortgage servicers - Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo (WFC) - are beginning to step up their efforts to ease the short sale process for borrowers who are unsuccessful in getting loan modifications and face the threat of foreclosure. Servicers are attempting to reach out to borrowers and are paying out more incentives to those suffering financial hardship to help proceed with a short sale. They are also cutting the time taken to approve short sales. Although, realtors are still complaining that the process takes too long.
The short sale is seen as an alternative to foreclosure for borrowers. In its simplest form, borrowers with underwater mortgages sell their homes to a buyer at a price that is approved by the lender. The lender normally forgives the difference between the loan and the sale proceeds - in essence the bank is being shorted for the loan amount. Foreclosures are also more expensive because of the legal expenses involved as well as the expenses for maintenance and upkeep while the property is in foreclosure.
Wells Fargo, for instance, incurred expenses on repossessed homes to the tune of $305 million in the second quarter and $408 million in the first quarter (according to data from SNL). Data for the other big banks was not available. Most of the short sales executed by Wells Fargo are in the harder-hit housing markets such as California and Florida, which is also where they service more loans. The borrowers in these transactions are fairly late in their delinquency stage, but Wells Fargo does engage with borrowers who reach out to them early in the process.
Investors are also willing to consider short sales as a first option. Short sale is considered a positive alternative to foreclosure. Investors for the most part will do a short sale over a foreclosure provided the net present value shows it that way. Investors have been very attentive to this, as has the Treasury.
Still, the short sale process is not easy and industry observers say sellers and buyers of short sale properties must set realistic expectations. Borrowers should realize that their credit scores aren't any less affected under a short sale than it is in the case of a foreclosure. In both cases, the borrower is considered in default. However, in a short sale the borrower's debt is often forgiven at least on the first lien. Also, a borrower who does a short sale might be able to apply for another mortgage sooner than he or she could in the case of a foreclosure, where the wait can be as much as 7 years.
In the simplest of cases, where loans are owned by the bank and there are no junior liens or mortgage insurance companies involved, a short sale transaction can be approved in as little as five days, provided all the documentation is in order. It gets more complicated when there are more parties involved. Investors, junior lien holders and mortgage insurers often want more documentation to prove financial hardship of the seller, proof of funding for the borrower and they usually want to negotiate the price. That adds to the processing time, which takes Wells Fargo an average of 15 days. The short sale process can go a lot more smoothly when the real estate agent is someone who understands how to do a short sale. This is not a regular sale where there is just one contract between a buyer and a seller.
Ken Kellogg