Banks encouraging short sales on underwater homes
Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.
Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller's outstanding loan.
Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by preapproving deals, streamlining the closing process, and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody's Investors Service in Manhattan.
Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody's. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a real estate information company.
Karen Farley hadn't made a mortgage payment in a year when she got what looked like a form letter from her lender.
"You could sell your home, owe nothing more on your mortgage and get $30,000," JPMorgan Chase & Co. said in the Aug. 17 letter.
Farley, whose home construction lending business dried up after the housing crash, said the bank agreed to let her sell her San Marcos, Calif., home for $592,000 -- about $200,000 less than what she owes. The $30,000 will cover moving costs and the rental deposit for her next home. Farley is scheduled to close the deal Friday.
"I wondered, why would they offer me something, and why wouldn't they just give me the boot?" Farley, 65, said. "Instead, I'm getting money."
A mountain of pending repossessions is holding back a recovery in the housing market, where prices have fallen for six straight years, and damping economic growth. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth, said RealtyTrac Inc., a property-data company in Irvine, Calif.