Short Sales Today - More Attractive to Borrowers and Lenders

Despite the flurry of loan modifications, principal reduction offers, other “loss mitigation” tactics, and increasing support from legislation to eliminate abuses in the foreclosure system, there comes a point when these cures simply are not enough to help borrowers who absolutely cannot afford their mortgages.  These measures won’t provide long-term remedies in the event of protracted loss in income or other lifetime shocks such as divorce or medical issues, and may only serve in “kicking the can down the road” instead of solving the problem.
 
For the most part, the general pool known as “distressed borrowers” would like nothing more than to become current on their payments and keep their homes.  At some point, unfortunately, adequate resources will not help; a short sale may be the only alternative.  Borrowers who embrace this alternative sooner rather than later could avoid the prolonged stress of the foreclosure process.

At the beginning of the housing crisis, lenders and servicers resisted the concept of a short sale.  These institutions assumed they could recoup more of their losses at a foreclosure auction, or through repossessing the property and listing it themselves (known as REO).  As the housing crisis began to unfold, however, these institutions found themselves reconsidering their stance for a number of reasons including:

• Increased government support for short sales through increased incentives and more inclusive guidelines
• Improprieties in lender due process in processing foreclosures were uncovered and became costly to litigate
• More laws were enacted at state and federal levels penalizing lenders for unscrupulous foreclosure activity and lack of maintenance on foreclosed properties
• The time it took to foreclose on properties and evict borrowers lengthened
• As property values fell, so did the value of REO and lenders’ hopes for recouping  losses through listing repossessed properties began to fade
• A new class of all-cash buyer emerged, creating a market for short sale transactions

Short sales today are a more attractive and lucrative option for borrowers thanks to full-blown lender support of the process.  Simply put, lenders lose less on short sale transactions compared to foreclosure or REO sales, even inclusive of lender incentives up to $35,000 in some cases for the borrower to short sale the property. 

As an interesting development, the by-product of recent regulatory and legislative activity has provided short sales with the real boost it needed to bring it to a tipping point of lender acceptance.  The $25 billion settlement between major lenders and individual states provided the most influential push.  Lenders included in the settlement were mandated to earmark approximately $17 billion in “homeowner relief,” with the lion’s share of that amount going toward short sales.  And, more recent developments in streamlining short sale guidelines require decisions to be made on short sale offers in 60 days and are even allowing borrowers who are current on payments to qualify for short sale hardship.  There’s even strong momentum in Congress for extension of the Mortgage Debt Forgiveness Act that benefits borrowers who forfeit their homes through a short sale transaction.

Some have dubbed 2012 “The Year of the Short Sale.”  This is really the year that homeowners have an alternative that works in their favor when it’s clear they absolutely cannot afford their current payments or any level of reduced payment.   The short sale option could be the best option for a fresh start.