A lender’s interest is in profit, and a foreclosure used to be more lucrative for a bank than a short sale. Now, however, the average foreclosure takes more than 300 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. In New York and New Jersey the process can take more than 600 days; time where no profit is being made on the house, and it remains as a negative entry on the bank’s books. This shortcut is becoming an increasingly more popular option for the nation’s three largest mortgage carriers, Bank of America, JPMorgan Chase and Wells Fargo. For more on this continue reading the following article from The Street.
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(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 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. Foreclosure 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.)"
A short sale is seen as a more palatable 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.
Previously, lenders were said to prefer foreclosures to short sales because they — or the investors in the loans — figured that more money could be made from the former.
But the average time for the foreclosure process- from the time of notice to the completed foreclosure- 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 foreclosure to be approved, the longer bad loans stay on banks’ books.
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.
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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.
But at a time when analysts are paying more attention how well expenses are managed, banks might be more willing to look at other alternatives.
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.
"Lenders often consider short sales as the lesser of two evils when compared to foreclosures," Core Logic noted in a May 2011 report on short sales. "While significant losses may be incurred in both foreclosure and short sale scenarios, the overall negative financial impact of short sales is typically less than that of foreclosure. In many cases short sales represent the best way for lenders to minimize their overall losses. In general, all parties fare better when a foreclosure is prevented."
JPMorgan is now paying certain types of borrowers- such as those with infamous option-arm mortgages as much as $35,000 to help them out with a short sale, the Herald Tribune reports.
JPMorgan spokesperson Holevas told TheStreet that the incentives vary and that they are available only for certain kinds of borrowers. She would not share specifics about the incentives.
CitiMortgages, the mortgage servicing arm of Citigroup(C) is paying an average $12,000 in incentives, up from between $3,000 and $5,000 in 2010 for short sales on its own loan portfolio, HousingWire reported in June, citing a senior real estate management executive.
Again these incentives are paid out by servicers on the short sales of their own loan portfolios. In cases where loans have been sold, investors often dictate how much is paid out. But it suggests that servicers are beginning to push short sales more aggressively.
J.K. Huey, a senior vice president at Wells Fargo Home Mortgage- REO and Short Sales says transactions through the bank’s proprietary program have been fairly stable. But the bank has seen a pickup in short sales through the government’s HAFA (Home Affordable Foreclosure Alternatives) program, which loosened restrictions in February.
Most of the short sales executed by Wells 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, although Wells does engage with borrowers who reach out to them earlier in the process.
Investors too are willing to consider short sales as a first option.
"Short sale is considered a positive alternative to foreclosures," said Huey. "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.
For one, 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 case, 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.
For buyers interested in bidding for short sale properties, the process can be frustrating. P/>Jeff Lischer, managing director for regulatory policy at the National Association of Realtors says banks are trying to do improve the process, but realtors still complain that the process is chaotic.
Most still say there is a lot of back and forth in the documentation process as well as disagreements over valuation of the property. Short sale contracts often fall through because there are multiple parties involved. And the process varies significantly from one servicer to another.
"It is hard to know what the rules are," says Lischer. "You can have a house with two loans serviced by two different servicers. You need to get four parties to sign off on your short sale, instead of one."
Wells’ Huey says that servicers are now using workflow processes that have shortened the processing time considerably.
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, she says.
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 on an average 15 days.
She also adds that 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," she said.
This article was republished with permission from The Street.
