Banks are Choosing Short Sales at an Increasing Rate

Posted By on March 5, 2010

Recently, there has been an increase in the number of short sales of homes facing foreclosure.  According to a recent article in The L.A. Times entitled “Short sales grow as a cheaper alternative to foreclosure,” short sales have quadrupled during the first 9 months of 2009.  Prior to 2009, banks were systematically refusing to participate in short sales (the unloading of homes for less than what was owed on the mortgage).  Instead, banks had been opting to take their chances on the foreclosure market.  As of late, though, banks have changed their attitude towards short sales because, basically, they’re losing less money from short sales when compared to the foreclosure process.

In a study by Amherst Securities Group, prime mortgage loan holders are averaging a loss of 45% when the property is foreclosed, as compared to 35% loss if the property is disposed of by the owner through a short sale.  Couple these figures with the depreciation in property value that inevitably follows when a home is left unoccupied for an extended period of time after a foreclosure, and it becomes clear why banks are becoming more receptive to short sales: Foreclosure has a detrimental effect on banks by reducing their income, as well as by depreciating their security.  Despite the bank’s willingness to accept more short sales there are still issues related to second mortgages that must be dealt with before these transactions can occur.

In a short sale, the second mortgage holder is forced to endure the brunt of the loss from the transaction. Normally, second mortgages are generally left in a position where they must agree to receive nothing or very little in order for the short sale to be approved. As such, they have leverage to hold up the sale.  Therefore, they need an incentive to release their liens. In most instances, first lien holders generally negotiate some partial payment to entice the second lien holder to release its mortgage. However, I recently wrote about (Are Big Banks Committing Short Sale Fraud?) an alleged trend that big banks are benefiting from: Banks are allegedly getting off-the-books payments from real estate agents and buyers for further enticement to release their liens.  Apparently, none of these “side deals” are being disclosed to the holders of the first lien, resulting in double payment to banks. Hopefully, this behavior is no longer occurring so we can continue the process of healing our housing market.

If you would like more information about this topic or would like to discuss your matter with a real estate attorney, either post to this blog or contact Larry Tolchinsky, Esq. by email, or call (954) 458-8655 and he will be happy to answer your questions. He offers a free initial consultation.

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