Short Sales Soar as Home Foreclosures Fall
The foreclosure crisis isn’t over, but a new trend in real estate sales could be the light at the end of the tunnel for many borrowers and lenders. Short sales, which occur when homeowners sell their homes for less than what they still owe, outpaced foreclosures for the first time ever in January, according to a new report from Lender Processing Services, Inc. Another report by RealtyTrac estimates that short sales rose 33 percent between January 2011 and January 2012.
Short sales accounted for 23.9 percent of January home sales, compared with 19.7 percent for foreclosures. The LPS report also says that while foreclosed homes sold at average discounts of 29 percent in January, homes in short sales were only marked down 23 percent. Short sales are also closing faster than foreclosure sales, and they relieve banks of the responsibility of managing and protecting vacant homes. With lenders poised to reap such significant benefits, the real question isn’t why they’re warming up to short sales, but why they’re doing it right now.
For starters, they’re being forced to. The Federal Housing Finance Agency announced this month that mortgage servicers will be required to review and respond to short sale offers within 30 days and make final sale decisions within 60 days. The new requirements, which take effect in June, have kept lenders busy expanding and training the staff needed to catch up with growing short sale demand.
But just as significant is the $25 billion settlement the mortgage servicing industry recently reached with the federal government and states attorney generals from 49 states. The settlement from the five largest loan servicers — Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo — is designed to atone for what became known as the “robosigning scandal”, in which loan servicers signed foreclosure documents without verifying their accuracy. Under the terms of the settlement, loan servicers can earn credit against the $25 billion total by agreeing to short sales and forgiving the deficiencies still owed on the loans.
“When the robosigning crisis hit, there was effectively an 18-month moratorium on foreclosures,” said Roy Oppenheim, a foreclosure defense attorney with Oppenheim Law in South Florida. “The banks got caught with their hand in the cookie jar and the lid slammed closed on it. Fraud, robosigning — it all came to a stop. But through this $25 billion settlement, they’re using the crisis to their advantage. The settlement creates a major incentive for the banks to do short sales.”
It’s not just the lender who wins in the event of a short sale. With the incentive for banks to forgive debts that remain after the sales, the typical homeowner walks away debt-free.
“For most borrowers, it’s a good idea,” said Todd K. Helwig, a real estate attorney with Mirick O’Connell in Massachusetts. “If you want to get out from under the burden of your loan, it’s usually the best way, as long as you can convince the bank to agree not to collect the remaining debt.”
Now that lenders are better equipped to process short sales, it’s also the fastest way for borrowers to walk away from their distressed properties. Damage to borrower credit is usually less severe with short sales than with foreclosures, as well.
Some borrowers can expect yet another perk. In order to help distressed borrowers transition out of their homes and into rentals to accommodate short sales, banks are offering cash incentives to selected homeowners. Wells Fargo has offered bonuses as large as $20,000 to homeowners whose foreclosures would be the most complicated and time-consuming.
Curbing Neighborhood Decay
Because short sales put new owners in vacant homes much faster than foreclosures, this trend could also turn around whole neighborhoods that have been hit hard by the mortgage crisis.
“Foreclosures killed the housing market and destroyed property values,” Oppenheim said. “Banks are terrible property owners.”
Foreclosed homes often stay vacant for extended periods, during which time the homes gradually decay due to lack of maintenance. Homes that are obviously vacant can also become attractive targets for thieves who break in to steal copper pipes, fixtures and other hardware. These circumstances cause the value of bank-owned homes to plummet, which negatively affects the value of all the other homes in the neighborhood.
“The banks are cannibalizing their own assets with foreclosures,” Oppenheim said. “With short sales, the effects on property values are not nearly as severe.”
The short sale trend should continue for at least a few more months, but one uncertainty could bring it to a halt at the end of the year.
The Mortgage Debt Relief Act of 2007 makes short sales more affordable for borrowers by waiving any taxes they might otherwise be assessed in the process. Before the act was passed, any debts forgiven by lenders would be counted as income and taxed accordingly. But this substantial tax break expires at the end of 2012.
“It all depends on whether or not the tax cuts get extended into 2013,” Oppenheim said. “If they don’t, we may see short sales drop off a cliff.”
If you’re in a distressed home and considering a short sale, you should contact a real estate attorney immediately if you hope to take advantage of the tax break. An attorney can help you determine if a short sale is right for you and assist you in negotiating with your mortgage lender to begin the process.