2010 IS THE YEAR of the SHORTSALE | Treasury Department Short Sale Guidelines
From Bloomberg News:
Banks are beginning to go along with short sales in increasing numbers, three years into a U.S. housing slump that pushed the economy into a recession and cut resale values by 30 percent from the peak in July 2006. Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier. Yet for each short sale, there were 25 foreclosures started or completed in the first half of this year, according to data from the Office of Thrift Supervision and the Office of the Comptroller of the Currency.
Wells Fargo, Bank of America Corp. and JPMorgan Chase & Co. this year have hired and trained more staff, developed software systems for expediting short sales, and increased marketing of short sales to delinquent borrowers.
Banks are increasing such sales under pressure from the Obama administration and lawmakers who criticized them for favoring foreclosures and delaying short sales, Green said. Lenders and loan servicers also stand to receive up to $2,000 in incentives to close short sales under a Treasury Department plan unveiled Nov. 30.
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Loan Modifications
The first choice for lenders has been to try to keep borrowers in their homes, offering loan modifications as an alternative to foreclosure. More than half of the modifications of delinquent mortgages re-defaulted within a year, according to a Sept. 30 report by the Office of the Comptroller of the Currency.
The single biggest problem was the lack of a vehicle or mechanism at most banks to handle short sales. Pressure is building to approve short sales as the number of delinquent mortgages has grown to 3.2 million and an estimated 7 million foreclosures loom in the next two to three years, according to Irvine, California-based RealtyTrac Inc., which compiles and sells U.S. mortgage delinquency data.
New Treasury Department guidelines for foreclosure alternatives scheduled to take effect in April 2010 will require lenders to consider borrowers for a short sale on their primary residence 30 days after missing two consecutive payments on a modified loan or after the borrower requests a short sale.
Treasury Plan
The Treasury Department would pay up to $1,500 for a homeowner to relocate, $1,000 to loan servicing companies that accept a sale and a maximum of $1,000 to help settle a second mortgage or subordinate lien. A lender must agree to release the borrower from all liability for repayment for the mortgage, under the Treasury plan.
In July, Wells Fargo began mailing notices to delinquent borrowers advising them that short sales might be an option to avoid foreclosure.
“When we determine that a loan is not affordable for the customer — either because a modification was denied or failed – - we obtain the value of the property, run it through our loan decision tool and then send a letter to the customer advising them of our short sale program, including the short sale price we are willing to take on the property,” Debora Blume, a spokeswoman for Wells Fargo Home Mortgage said in an e-mail.
‘Pick a Pay Loans’
Wells Fargo is focusing on delinquent borrowers in Florida and California homeowners with “Pick-a-Pay” loans originated by Wachovia Corp., Blume said. Wells Fargo acquired Wachovia in December 2008 and owns the “Pick-a-Pay” loans outright, said J.K. Huey, the bank’s senior vice president overseeing short sales and bank-owned properties. That allows the company to approve a short sale without consulting investors or parties that can hold up transactions.
“Pick-a-Pay” mortgages have among the highest rates of negative equity, because borrowers could select their monthly payments, often paying less than the interest, with the difference added to the principal. That formula means that total loan debt was increasing at a time property values were falling.
Wells Fargo held $87.8 billion of such loans as of Sept. 30, down $7.5 billion from the end of last year. Wells Fargo Chief Financial Officer Howard Atkins said on an Oct. 21 earnings call that the bank is reducing the number of loans with “negative amortization potential.” As of the end of the third quarter, 26 percent of the loans in that portfolio now have minimum monthly payments that fully cover the interest due so that the total principal does not grow, up from 16 percent at the end of last year.
As of Sept. 30, Wells Fargo had modified 43,500, or 22 percent, of the distressed loans to reduce borrowers’ payments, Atkins said.
Reaching Out
JPMorgan doubled the number of staff trained to handle short sales after adding 5,000 people since Jan. 1 to deal with distressed mortgages, said Thomas Kelly, a spokesman for the New York-based bank’s home lending division.
Chase services 10.3 million mortgages worth $1.4 trillion, according to Kelly. Of its portfolio, Chase reported 422,000 loans more than 60 days delinquent, about one third of which were in loan modification programs, according to a Nov. 10 Treasury Department report on the Obama administration’s Making Home Affordable Program.
“We’re reaching out to people who are struggling with the Obama loan modifications or our own,” Kelly said. “Approaching customers is a very recent phenomenon.”
Bank of America, the nation’s largest loan servicer, had one of the lowest loan modification rates, with 14 percent of problem loans in trial workout plans as of Oct. 31, according to the Obama Administration.
The Charlotte, North Carolina-based bank started a “cooperative short sales” program in October and may close its first short sale through the program this month, said Dave Sunlin, senior vice president for foreclosure and real estate management.
Pay-Option Mortgages
Many are borrowers with pay-option adjustable-rate mortgages issued by Countrywide Financial Corp., Sunlin said. BofA bought Countrywide, once the nation’s largest mortgage originator, for $4 billion in stock in 2008.
“We typically expect a 10 to 15 percent decrease of loss severity with a short sale,” Sunlin said.
Losses on prime loans going through the foreclosure process averaged 49 percent versus 34 percent for a short sale as of Oct. 1, according to a Nov. 10 report by Laurie S. Goodman, senior managing director of Amherst Securities Group LP. For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale, Amherst reported.
“The loss severity of short sales is lower but it’s not low,” Goodman said.
Short sales benefit a neighborhood because they clear out stagnant properties that may have an adverse effect on values.
Americans are out there still buying homes and trying to move it along.
Short sales also help the bank, because foreclosed properties lose more value when they are vacant or a homeowner vandalizes a house on the way out.
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