Hat tip to clearfund for sending this along, from cnbc.com:
Earlier this week a top executive at Bank of America told an REO conference in Dallas that the lender would be focusing more on short sales than ever before.
At first hearing this, I assumed it was because of the government’s Home Affordable Foreclosure Alternative Program, which provides cash incentives to servicers and borrowers for short sales and also streamlines the process, but of course there’s way more to it than that.
Said Bank of America exec, Matt Vernon, whose official title is National REO, Short Sale and Deed in Lieu Executive (his childhood dream title I’m sure), granted me an interview this morning, and was pretty clear as to why B of A is pushing these alternatives.
“We understand the reality; a large number of homeowners won’t meet the eligibility for the HAMP (the government’s Home Affordable Modification) program,” Vernon says. He also noted the sheer volume of borrowers now coming through the short sale process. He expects to see far more.
The big difference, he says, is that BofA, as well as some other big banks, are changing the model from reactive to proactive. In other words, instead of waiting for a borrower or real estate agent to approach the bank with an offer for a short sale, they are using a “cooperative approach, with homeowner, Realtor and servicer on behalf of investor, working to move that property through the process. All three of the interested parties holding everything together,” Vernon explains.
So the servicer sets a minimum value for a short sale and then the borrower and Realtor go out and find a buyer. When they do, the process then moves far more quickly because it’s already approved.
Of course there’s always the financial incentive as well. With so many borrowers either falling out of or not qualifying for the modifications, a huge flood of properties are moving to REO (bank owned). In fact, the latest report from RealtyTrac Thursday showed a record number of REO’s in May.
Which leads me to another report from Clayton Holdings, which finds short sales cut risk severity by 13 percent more than REO sales. And in some states where the foreclosure process is more lengthy, short sale loss severities can be as much as 26 percent lower than REO loss severities.
“I would say that’s generally accurate in what we see,” agrees Vernon. “It really comes down to time. The quicker you can facilitate the property moving.”
The good news is, that will cut down on foreclosures. The bad news is that short sales, like it or not, are comps. They sell for less, and consequently bring down the values of properties around them.
(JtR note: I have not seen nor heard of any pre-approved short sales in the field….at least not yet, and am skeptical of the homeowner’s enthusiasm for ‘holding everything together’.)
The exits are getting crowded in mission hills and the traditional sellers are starting to price aggressively and in many cases are priced below comparable bank REO offerings. The banks made a major mistake by waiting for higher inventory to start listing property and compounded the mistake by listing at last year’s prices.
FBI coming for the dirty mortgage brokers next week:
http://www.ft.com/cms/s/0/da70fbfa-74e0-11df-aed7-00144feabdc0.html
The banks need to demand their realtor lists the home and bypass the homesquatter.
They should give the ho-squat $5,000 cash-for-keys in exchange for a deed-in-lieu, and put it on the open market after they move out – and make the agent prove it was on the MLS for at least four days before fielding offers.
All problems solved.
And have a central website where all buyers’ agents can upload their own offers directly to the bank – boom, end of SS negotiators dumping their fee on the buyers.
Now all problems solved, unless you want to add an open bidding process too.
a deed in lieu is problematic when there is a 2nd involved (which is most troubled homes I believe) as you don’t want to take title with those outstanding liabilities…being on title as the owner opens up potential liabilities which is problemtic.
At least the foreclosure process limits some of the liability of reo ownership.
#5 is effectively what we are doing where we have have the buyer’s agent fax/email offers to a specific fax number (or email) which then emails the pdf of the offer to both the agent and us (reo seller) at the same time…problem solved for $9/month. Any offer not faxed/email as requested is rejected until they follow the procedure.
unless you want to add an open bidding process too.
ebay? 🙂
You guys make way to much sense!
p.s.: clearfund, I *always* look forward to your comments. 🙂
Short sales open up the homeowner to anti deficiency judgments, which is why the banks want to pursue them.
This is regarding a 1st home loan, and in some cases an 80/20 loan…
A foreclosure in Ca and Az are non recourse in most cases, and the lender cannot pursue. Hence the eruption in foreclosures recently.
Also, people who own property are figuring that the hit to their credit score is not as bad as owning a $500K depreciating asset.
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/11/AR2010061104812.html
Nice story in the WaPo about how a bank in Florida foreclosed illegally on someone trying to participate in the federal loan modification program and how they were punished by having their note cancelled.
Nice to see a major bank trying to make the process work.I am in Sonoma County,good luck trying to price the midrange here,opinions on price by experienced Brokers are varying 25% or more for similar homes.Interesting times.
MJ- “Also, people who own property are figuring that the hit to their credit score is not as bad as owning a $500K depreciating asset.”
This needs a computation. In part we don’t know what the future impact of the credit score is.
Do the person own a car, and if so, how much will auto insurance go up? How about the job that isn’t offered based on the background check?
That said, for the majority of persons, financially it’s probably the best thing that can be done (and only on the advice of competent professionals!).
Using Vegas as an example, where selling prices have gone down by 70-75% (+/-), if someone borrowed $450k to buy a $500k place (90%), the market value today is about $125k-$150k, for a loss of $350k-$375k. To make things simple, let’s assume interest only, so the place is short by $300k-$325k.
How many years would it take the “owner” to pay this off? When is the market going to recover? What’s the owner’s current and future income?
I have a friend who owns a place that she purchased for ~$285k. Today the place might be worth $200k, on a very lucky day. It’s probably closer to $185k, and I’m not sure it’d sell at that price. My estimate is $175k, but maybe I’m guessing low. A somewhat similar unit has been listed for quite some time for $190k. The exact value doesn’t really matter, however. It’s a rental, she wants to sell it, but she really wants to sell it for more than $300k, since the purchase price didn’t include many of the ‘extras,’ like the appliances, blinds, landscaping, and whatever else.
So the question is: What to do as the owner?
Should she take her losses today? Should she hope for better in the future?
I keep reminding her that another friend purchased GM stock near the peak. $150k. He kept suggesting it would recover, until the events of September 2008 made it clear: essentially there would be no GM recovery, at least for his holding. I’m not suggesting the property will go down to zero value, but if it doesn’t recover soon enough, then it will be a drag on her finances for quite some time, probably forever.
Back to the original question, regarding credit scores, it’d be nice to know:
1. The future impact on the credit score (note too that with more people playing the game, the playing field is being leveled).
2. The future value of the home (when will it increase in price, if ever on a NPV basis).
3. Cash flow: Negative cash flow can only go on for so long.
Is selling before the peak better than being trapped in a declining market?