The government introduced terms of a new short sale program that offers first and second mortgage lenders an incentive of up to $1,500. This program also offers the borrower/seller up to $1,500 in relocation assistance to move. When added together, the government hopes these $4,500 worth of incentives will be enough to shift the current anti-short sale sentiment.
Short Sales – Defined
A short sale occurs when a homeowners owes more on their home than he/she can get by selling the home on the market. If the bank allows this sale, it is consider a short sale because the sale will essentially leave them short of their outstanding mortgage. Depending on the state, the bank may be allowed to come after the seller for the difference at the time of the sale or at a later date when the seller has more capital.
Banks rarely like to allow short sales because it forces them to write-off the balance of the mortgage. It also makes it much harder to collect a deficiency after the sell. If a borrower has the means to pay the mortgage, the bank would prefer to continue to collect mortgage payments until the market rebounds and they can be repaid in full. Imagine lending a friend $10,000. This friend pays down the debt monthly, but decides to settle the debt for 50% after making three payments. Unless the friend has substantial hardship, one would expect them to repay the full amount. Banks are no different.
Can the New Short Sale Program Work?
The economics of the program do not make sense for banks unfortunately. Most underwater mortgages are underwater by 20%+ or $20k+. Offering a bank $1,500 to settle a debt of $20k or more will do very little. Banks that believe the current borrowers have the ability to pay would be doing their shareholders a disservice by accepting $1,500 to settle that level of debt.
Furthermore, a borrower needs no incentive to pursue a short sale. They get relief from the reduction in their mortgage payment, often cutting their payment by half after a short sale. Many borrowers stay in the neighborhood and rent a similar, or even nicer, home and pay half their monthly payment. Offering them an additional $1,500 is simply a waste of government money. At the very least, this money could go to sweeten the incentives for banks, who take a disproportionate loss on short sales.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
