Is That Fear? (Bank Short Sales)

You have to wonder….

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 pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.

You mean like, for example, Nevada deciding to actually treat perjury as the felony that it is, and issue a 606 count indictment (along with materially beefing up laws that criminalize this practice.)

It seems to me that perhaps — just perhaps — banks are coming to the conclusion that recovering something on an improperly-documented loan beats recovering nothing, and the latter is becoming increasingly likely.

The better question however is what sort of title is something who buys such a short sale getting?  Is the chain of title any good and did they actually get marketable title?  If not, and they bought owner’s title insurance, is that insurance able to pay (and is the defect not excluded)?

For homeowners who are dramatically underwater and not paying, however, these sorts of “bribes” do make sense.  Recovery value is going to be dramatically impaired if the person in the house is uncooperative and simply sits and waits for the sheriff to show up.  It’s also often that person’s best move if their credit is already trashed, and if they haven’t paid in a year, it is.

One item I’ve noted in the local area is that banks are stringing along short-sale buyers for months, often allegedly telling them they’ll approve a deal in 60 or 90 days and then when there’s a week or two left they ask for more time — usually another month.  Not only does that prevent the house from becoming part of the “cleaning” in the market it also holds the proposed buyer off the market — they are neither a homeowner or looking for another, conventional deal!

To the extent that we’re actually getting decisions and clearing of the market, even as a small incremental step, this is a positive development — even if the motive of the bank making the offer is questionable at best.

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