Banks Favor Unloading Short Sales

Short sales are when a seller sells a home for less than what is owed with the permission of the lender, and the lender subsequently forgives the difference …

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Short sales are when a seller sells a home for less than what is owed with the permission of the lender, and the lender subsequently forgives the difference between the sale amount and the loan. Banks are in a hurry to eliminate these short sales and foreclosures from their books by selling them off, and a new report from RealtyTrac reveals banks prefer selling short-sale homes (pre-foreclosures) over foreclosures. The former has outsold the latter in many pacesetting markets including Miami, Los Angeles and Phoenix due in part because getting the property out of inventory before it enters the foreclosure process is better for banks in the long run for many properties, and also because a short sale typically commands a higher price than a foreclosure. For more on this continue reading the following article from TheStreet.

Banks continue to show a preference for short sales over foreclosures as a way of disposing off their non-performing loans.

According to the latest report from RealtyTrac, sales of properties in pre-foreclosure- those that have received a notice of default or scheduled for auction- rose 15% in the fourth quarter of 2011 over the year-ago period.

In contrast, the sales volume of bank-owned properties (REO) was down 12%.

Pre-foreclosure sales, which is usually executed via short sales, accounted for 10% of all residential property sales in the fourth quarter.

"We continued to see a shift toward pre-foreclosure sales, or short sales, and away from REO sales in the fourth quarter," Brandon Moore, CEO of RealtyTrac said in a statement. "Pre-foreclosure sales outnumbered REO sales in several bellwether markets, including Los Angeles, Miami and Phoenix, where REO sales had outnumbered pre-foreclosure sales a year ago. That trend will likely show up in more local markets in 2012 as lenders recognize short sales as a better option for many of their non-performing loans."

In the simplest form of a short sale, 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.

In cases where loans are sold, investors also need to approve the short sale. However, given the delays in the foreclosure process, investors seem more inclined to accept other alternatives to foreclosure.

As TheStreet reported last August, banks including JPMorgan Chase(JPM), Wells Fargo(WFC) and Citigroup(C) have paid out incentives to borrowers to encourage them to consider short sales rather than hold out for a loan modification that may not be possible and risk losing their homes ultimately to foreclosure.

A JPMorgan spokeswoman told TheStreet at the time that the bank said it saw short sales as an option that was good for both the homeowner and for the bank. It said incentives vary and are available for only certain types of borrowers. Wells Fargo also said it had stepped out its outreach efforts.

According to a recent Bloomberg report, banks have continued to pay out heavy incentives, as high as $40,000 in some cases. Citigroup offers $3,000 to most borrowers and more in some circumstances, the report said, citing a bank spokesperson.

Bank of America offered 20,000 Florida homeowners as much as $20,000 as part of a pilot program that expired in December, according to the report.

The average sale price in a short-sale transaction also appears to be substantially higher than that of a bank-owned property, one more reason why banks may be more inclined to do short sales. According to RealtyTrac, pre-foreclosure home sold for an average of $184,221 in the fourth quarter, down 3% from the previous quarter and down 11% from the fourth quarter of 2010. But that is higher than the average sale price of a bank-owned home or REO at $149,686.

Of course, the sale price of any home in the foreclosure process, be it one that has received a notice of default or one that is already bank-owned, still suffers an average discount of about 30% in the market, compared to a home that is not in foreclosure, the report showed.

Pre-foreclosure sales increased more than 20 percent on a year-over-year basis in several states, including Michigan (up 103%), Georgia (up 59%), Arizona (up 48%), Washington (up 36%), Nevada (up 29%), Oregon (up 27%), Illinois (up 26%), Ohio (up 25%), California (up 23%) and Texas (up 22%).

This article was republished with permission from TheStreet.

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