Short Sale Madness

for sale - short saleDistressed home sales in which the lender cooperates to cut the amount of principal owed are likely to increase in 2010, but the number of “short sales” is unlikely to have any real impact on the housing market, according to a new Housing Predictor study.

The small number of short sales that are actually approved by banks represent less than 1% of all homes at risk of foreclosure. Data from the Office of the Comptroller of Currency shows that only 40,000 short sales were completed in the first half of 2009, the latest period available.

Only an estimated 8 to12% of all homeowners who request short sales bank owned houseaccomplish a completed sale. The small percentage leaves a gapping hole in the troubled banking industry’s problem with short sales since lenders only write off short sales as a loss when a property is sold.

An increase in distressed properties listed for sale is already beginning to develop in Southern California, which may be the first indication of a growing second wave of foreclosures. Dana Point has seen its inventory of foreclosures and short sales rise to more than 24% of all homes listed for sale and nearby Laguna Beach and San Clemente have seen similar increases. The rise in troubled properties indicates that lenders have increased foreclosures and may be showing more cooperation in the case of short sales.

As part of its program to repair the damaged housing market, the Treasury Department has passed a sweeping series of rules to expedite short sales. But the program, under which bankers will get $2,000 in exchange for handling a short sale doesn’t start until April. The plan is also beleaguered by the same flawed logic that the Obama administration has with bankers to modify mortgages on only a voluntary basis.

Major banks claim they have hired extra staff to handle short sales, and purchased new software to assist in the process. JP Morgan, with one of the highest default rates in the industry says it has hired 5,000 new employees to handle distressed sales. The longer payments aren’t made on a mortgage the more a bank loses on its capital.

Bank of America has also spent big on upgrading its system to handle short sales and foreclosures, but has also driven many troubled borrowers further away from working with the bank by out-sourcing much of its process to an India call center. The lender services about 14 million mortgages, including millions of troubled loans it got in B of A’s purchase of failed Countrywide Home Loans.

Above all else the biggest problem with short sales is getting approvals from bankers. The number of approved sales increased in the third quarter of 2009, but industry analysts aren’t sure how much yet, awaiting final government figures. Real estate agents are trying to price properties at levels where they will get approvals, but bankers all too often argue that the price being offered by a purchaser is too far under market to approve the sale.