Treasury Adds Fuel to Short Sales Fire
Short sales are really taking off and the Treasury Department is about to add rocket fuel to this foreclosure alternative.
During 2009, the use of short sales jumped nearly 125%, according to a quarterly report by the Office of the Comptroller of the Currency and Office of Thrift Supervision.
The 12 largest bank and thrift servicers completed 37,600 short sales in the fourth quarter, compared to 16,800 in the fourth quarter in 2008.
In a short sale, the lender or servicer allows the delinquent homeowner that is underwater to sell the property to avoid foreclosure and walk away debt free.
Under Treasury’s Home Affordable Foreclosure Alternative program, servicers, investors and distressed homeowners will be paid incentives for completing short sale or deed-in-lieu transactions. And just before the start, Treasury increased the incentives to give HAFA an extra boost. Now servicers can receive a $1,500 incentive payment and the homeowner can receive $3,000.Originally, Treasury proposed to pay the servicer $1,000 and the homeowner $1,500 for relocation costs.
“That $3,000 is going to turn some heads,” said Travis Olsen, chief operating officer of Loan Resolution Corp. “That is going to make it truly worthwhile,” he said, for the borrower to complete a short sale.
LRC, based in Scottsdale, Ariz., specializes in short sales. The COO says business is up dramatically this year. However, he expects short sales will take off like a “rocket” once the HAFA program kicks in. Short sales can be complex and time consuming even with a willing buyer and seller. The mortgage investor or bank is taking a loss and has to agree to the sale. It can take months to reach an agreement on a sale.
The HAFA program is based on a pre-approved sales price before the property goes on the market. And the bank has 10 days to accept or reject a buy offer.
In a pre-approved short sale, it generally takes 30 to 60 days to list and market the property and another to 45 days to close. Olsen said it will be four months before the HAFA program begins to impact the short sale numbers.
Another obstacle to short sales is second liens. To complete a HAFA short sale, subordinate-lien holders have to relinquish their claim so the property can be sold. Treasury has doubled the incentives to pay off the second-lien holder and reimburse the first mortgage investor. Under HAFA, the investor can pay the second-lien holder up to 6% of the loan amount with a $6,000 cap. Treasury will reimburse the investor on a one-for-three match with a $2,000 cap.
Meanwhile, the major banks that are big investors in second liens are coming under pressure from Congress and the banking regulators to facilitate loan modifications. And that pressure could make HAFA payoffs more attractive to these banks.
House Financial Services Committee chairman Barney Frank, D-Mass., has summoned executives from Bank of American, Citigroup, JPMorgan Chase and Wells Fargo to testify before his committee on April 13.
Rep. Frank is concerned the major banks have become the “principal obstacle” to modifying first mortgages because they won’t write down their holdings of second liens and home equity loans. Three of the banks have signed up to participate in Treasury’s fledging second-lien mod program. But it has not shown any results yet. “We will be urging the banks to show full cooperation with this plan,” Rep. Frank said.