Why Short Sales Work – Follow the Money

ALG & Associates Explain the Incentives that Encourage the Use of Short Sales

 In past years, lenders have rarely considered short sales and, instead, opted for deeds in lieu of foreclosure or foreclosure.  However, with the current mortgage crisis, the rules of the game have greatly changed.  With current rule changes, lenders are not only considering short sales, but are processing them with greater speed and approving them with greater regularity.

Recently, a client of ALG & Associates asked “Why would a back approve a short sale?”  Short sale specialist Anthony Carroll with ALG & Associates explained that “It really is based on the simple principle of loss mitigation…short sales result in a greater net payment to the bank!”  The Short sale specialist continued “lenders and the borrowers now have strong economic incentives to consider short sales as an alternative to foreclosure.”

Here are some of the economic benefits for investors, servicers and lenders:

·         On average, lenders lose 50% on a foreclosure.  In contract, lenders lose less than 30% on a short sale. 

·         Short sales assist lenders in removing non-performing or delinquent loans from their financial books.  Unlike foreclosure, short sales do not require the lender to market and sell property acquired by the lender at a foreclosure sale – eliminating thousands of dollars in sales commissions and holding costs such as taxes, insurance and maintenance.

·         Under the Home Affordable Foreclosure Alternatives program, servicers receive a $1,500 “processing fee” for handling a short sale.  Similarly, investors who actually own the mortgage notes receive $2,000 in exchange for sharing proceeds of the short sales with any second-lien holders and those second lien holders receive up to $6,000 for releasing their claims.

Here are some of the economic benefits for borrowers:

·         Under the Home Affordable Foreclosure Alternatives program, borrowers are eligible for a $3,000 relocation assistance payment.

·         Borrowers are able to sell their home.  In some markets, absent a short sale, the borrower would not be able to sell their home as market values continue to decline.

·         Borrowers may receive a waiver of the deficiency claim thereby absolving the borrower to pay the remaining balance due on the loan, after crediting the proceeds from the short sale.

·         Borrowers are able to avoid the stigma associated with foreclosure and/or bankruptcy.

·         Borrowers do less damage to their credit score – whereas a foreclosure result in a 200 point decrease in their FICO score, short sells result in a penalty of approximately 100 points.

Before you simply walk away from your property, you should know that there are alternatives.  In many cases, these alternatives:

·         Reduce the likelihood of bankruptcy;

·         Provide funds to assist with relocation to a new residence;

·         Result in less social stigmatization; and

·         Assist the borrower to re-establish their credit by minimizing the damage to their credit rating.