Short Sales vs Foreclosures

GOVERNMENT HOME AFFORDABLE FORCLOSURE PROGRAM

The government’s new plan is voluntary for lenders, and it does not include Fannie Mae and Freddie Mac owned or guaranteed mortgages as they are working on their own solutions to assisting and speeding up the process.  The government’s new plan allows for homeowners to receive $3,000 for moving expenses if the seller agrees to a short sale or deed in lieu of foreclosure.  A short sale or deed in lieu of foreclosure is better on the sellers credit than a full blown foreclosure and will allow the seller to purchase a home much sooner than a foreclosure. 

The plan also stipulates that the seller will not receive a deficiency judgment, so the seller won’t be bogged down with debt payments in the future resulting from the sale of the property.  This is big as it’s been a stumbling block for many sellers in accepting a short sale.  The seller’s housing expense ratio should exceed 31% or lender will believe seller can afford payment, and lenders will be particularly mindful of strategic defaults where seller has money saved but chooses to walk away anyway, especially on the higher loans. 

New regulations, if the lenders agree, stipulates that the 2^nd mortgage holder will receive 6 cents on the dollar, which is far more than a foreclosure where they won’t receive anything, and much more than the 2-3 cents banks sell debt for on open market.  The 2^nd lien holders have held up many short sales, and now that the government has set guidelines, it should make it easier having a roadmap to negotiations. 

New guidelines also call for lenders to make decisions within 10 business days as to the viability of doing a short sale, and banks such as Bank of America are committing resources so that agents will now receive communications within 2 days, so the days of asking questions and not hearing anything for weeks or months may be over.  Bank of America has put systems in place whereby an agent can contact a negotiator’s supervisor if the agent has not heard a response within 2 days, and the Treasury department has given us an e-mail address to escalate all inquiries no matter who the lender is so they can step in and help. 

Short sale transactions could one day outnumber foreclosures, and that would be a good thing as sellers credit is better preserved, and lenders generally lose less money on a short sale versus a bank foreclosure, and 2^nd lien holders get paid something.  The property tends to remain maintained and require less fix up than an abandoned or vandalized property, which further upholds values in the neighborhood. 

Many short sales are priced too low and will never sell, they subliminally drive values down in the market as some view the unsalable short sales as the new market value when in fact they’re artificial and won’t be approved.  When banks decide to speed up the process, or issue pre-approved pricing, this should help alleviate this phenomenon and improve the market almost immediately. An advantage few people think about. 

This sounds great, yet it will depend on how many of the lenders and investors participate in the voluntary government program.

Foreclosures Of Mortgage, Agreement For Deeds, And Statutory Liens