Banks Now Prefer Short Sales To Foreclosures

Banks dealing with lengthy, complicated and frequently messy foreclosures are starting to see "short sales" as a quicker and cheaper way of getting bad loans off their books.  The nation’s biggest mortgage servicers- Bank of America, JPMorgan Chase and Wells Fargo – 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 foreclosures.  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 down the time taken to approve short sales, although realtors still complain that the process takes too long. 

JPMorgan has processed 120,000 short sales through its proprietary program since June 2009 and now averages 5,000 short sales a month. The bank says its average response time to approve a short sales transaction is 30 days.  "We think the short sale is a good solution for many struggling homeowners and we let them know that it’s an option," said Christine Holevas, spokesperson for JPMorgan in an email. "Our outreach efforts have increased in the past year or so. Foreclosures can be an expensive and lengthy process for all parties. It’s a good deal for the homeowner and a good deal for us (a cheaper way to get a bad loan off the books.)"

The average time for the foreclosure process- from the time of notice to the completed foreclosures- is now 318 days in the U.S., according to RealtyTrac.  The foreclosure process in the state of New York, which follows a judicial process, took 966 days on average for properties foreclosed in the second quarter. New Jersey and Florida followed with an average processing time of 944 days and 676 days respectively.  The longer it takes for a foreclosures to be approved, the longer bad loans stay on banks’ books. Foreclosures are also more expensive than short sales, 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 wasn’t available.  According to real estate analytics firm CoreLogic, the number of short sales in the market have tripled in the last two years and transactions are anticipated to grow by 25% in 2011. The markets with the largest short sale volume are California, Arizona, Colorado and Florida.

NorthWest Real Estate

The madness continues. Bank of America (BoA) is considering a special program for unemployed borrowers that would offer as many as nine months of no mortgage payments while they hunt for a new job. A spokesperson for BoA says that the program is still pending regulatory approval. Whether or not the payments are forgiven or just deferred has not been solidified yet, but according to the spokesperson, a likely option would be to capitalize the past due payments into the new permanent modification. If the borrower finds employment during the nine-month period, BoA would structure a loan modification using its own programs or the Home Affordable Modification Program (HAMP). BoA completed almost 32,900 HAMP permanent modifications through March, up from 20,666 in February.

BoA was the first to commit to the HAMP second-lien program from the Treasury and the first to offer principal write-downs as part of the servicing process. If the borrower cannot find a job after nine months, the borrower would enter into a previously agreed upon deed-in-lieu of foreclosure arrangement. BoA would offer a minimum $2,000 “cash-for-keys” check to the homeowner. “Sustained recessionary impacts and their effect on the unemployed, in particular, demand we consider creative solutions above and beyond what is currently available to put these customers in the best possible position to sustain homeownership,” the BoA spokesperson said. This month, 15 million people held no job, and the overall unemployment rate stayed at 9.7% in March – the same as February, according to the US Department of Labor.

NorthWest Real Estate