As if they are doing everything backwards, Treasury has finally decided to try to incentivize banks to provide one of the best (and earliest) solutions for distressed homeowners - short sales. Short sales were the first fix that many distressed homeowners looked to in order to be able to sell their underwater home - starting back in 2007. Unfortunately, for a myriad of reasons, banks have been less than cooperative in approving them. It often took 4 months or more to get a short sale approval. By that point, the potential buyer has walked. Banks have since tried to streamline the process a bit, but many still take months to get approvals through.
Studies have shown that banks lose over 100% more by going through traditional foreclosures than they do in a short sale. The market value of a home also ends up much lower in a foreclosure - hurting the values of surrounding homes and jeopardizing whole neighborhoods. So everyone loses in a foreclosure. But banks often have their hands tied because they don't own the loans (investors often do), or they want to delay realizing a loss on the mortgage for as long as possible due to their capitalization requirements. Completing a foreclosure takes two to three times as long as approving a short sale - thus prolonging the inflated value of the mortgage on the bank's books.
Another issue is that many of the second lienholders on homes are covered by private mortgage insurance and need to get the insurer to agree to cover at least a portion of their loss if they approve a short sale (which they would have received if the property was instead foreclosed upon).
Now, finally after two years, someone has gotten through to Treasury with the idea that short sales need to be completed more efficiently in order to help homeowners. Their solution - announced yesterday - is to provide a $1,000 incentive payment to lenders that approve short sales and additional incentive payments to junior lienholders who approve the short sale. This will hopefully give banks and investors even more reason to speed up the short sale approval process and make more homeowners eligible - thus helping stem the tide of price depreciation in places like Arizona.
Comments