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Chapter 4: Reasons Mortgage Holders Find Short Sales a Viable Option (full)

Lenders are beginning to see shortsales as a viable optionWhile it is obvious that a short sale offers benefits for both sellers and homebuyers, more mortgage holders are beginning to realize that this option can be beneficial to them as well. In fact, more and more lenders are beginning to view short sales as a viable option for loss mitigation, helping them to curb losses and recuperate as much of their investment as possible.

Some banks are even beginning to provide homeowners with incentives to go through with a shortsale rather than waiting to go through the foreclosure process. Instances have recently occurred when banks have offered thousands in relocation money to borrowers who choose to go through with a short sale.

Why are lenders beginning to see these sales as a viable option? Here are a few of the top reasons that mortgage holders are finding shortsale transactions a more popular option today.

Foreclosure Proceedings Now Take More than 300 Days

One reason lenders view short sale transactions as a viable option is because foreclosure proceedings are now averaging more than 300 days. Reports from CNBC have noted in the past that loans in foreclosure have been delinquent on average for 631 days. Of course, the processing times can vary greatly from state to state. In judicial states, the foreclosure process often takes much longer than in non-judicial states.

In some cases, months of auctions may take place and these auctions do not even promise lenders a sure sale. Foreclosures are also continuing to flood the market, which means most lenders are dealing with a huge inventory of foreclosures that they are trying to sell to recuperate some of their lost money. Long foreclosure processes also make it harder for the real estate market to begin recovering, something that most lenders are taking into consideration.

Many lenders are realizing that the length of foreclosure proceedings can be costly and can keep them from recovering any of their investment quickly. For this reason, short sales have become a more attractive option. This has led many banks to begin increasing the short sales they accept, leading to a recent surge in short sale property options on the market today. In fact, in 2013, it is expected that short sale properties will soon outnumber foreclosures as lenders begin using them to avoid the long foreclosure process.

Shortsales Provide Immediate Payment to Lenders

Another reason that banks now view shortsales as a viable option is because they can enjoy immediate payments when they choose this route. When waiting for a home to go through the foreclosure process, it could be months or more than a year before the lender finally gets any money back from the home. However, with a short sale, lenders can enjoy immediate payment on the home, as soon as they approve the short sale and the sale closes.

Even though foreclosures may go up for auctions, lenders are not assured of a sale, which means they may not get back any of their investment in today’s very uncertain market.

Lenders are Dealing with a Huge Flow of New Foreclosures

Although some real estate professionals expected 2012 to bring a reduction in new foreclosures, unfortunately, that was not the case. Throughout 2012, foreclosures continued to surge, with hundreds of thousands of borrowers facing foreclosure during 2012. It has been reported that since 2006, more than 5 million homes have gone through foreclosure within the United States and the flood of foreclosures continues to hit the U.S. real estate market.

This continuing flow of new foreclosures has led to quite a backlog of foreclosures with lenders. Most banks are holding a large inventory of foreclosures and finding it more difficult to sell foreclosures, especially since the market has been so flooded with low cost properties.

To avoid dealing with more foreclosure properties, banks are turning to short sale transactions to help reduce the flow of foreclosures. This helps lenders avoid adding even more properties to their inventory of foreclosures, which has led to banks offering incentives to homeowners that agree to a short sale instead of going through the long foreclosure process. Reducing the percentage of foreclosure loans with short sales also allows lenders to meet investor guidelines, which is important to lenders as well.

How Short Sales Save Lenders Money

A short sale can save the bank moneyLenders are beginning to see short sale transactions as an excellent loss mitigation technique, since these transactions often allow them to save a lot of money. Foreclosures are losing lenders a huge amount of money, since the process is expensive and time consuming. The costs can quickly become exorbitant for mortgage companies pursuing foreclosures. Freddie Mac has estimated that lenders pay $60,000 on average to foreclose a property. Other estimates have placed the total cost to the lender, local government, community and homeowner at about $80,000.

Both paper losses and out of pocket expenses are a problem for lenders dealing with foreclosures. While paper losses are less than optimal for banks, most lenders are more concerned about the out of pocket costs that foreclosures bring. The following are some of the costs lenders face when dealing with foreclosures.

Foreclosure Sale Fees

To get a non-judicial foreclosure started or to initiate a lawsuit, lenders have to pay for newspaper publications of sheriff sales or for suit filing fees. In many states, lenders must publish a notice of sale or default notice for 3-4 weeks consecutively. This is an out of pocket expense paid for by lenders.

Legal Fees

When pursuing a home foreclosure, lenders end up hiring local attorneys, which once again costs the bank. When homeowners decide to defend against the foreclosure process, extending the process, the legal fees charged by attorneys can end up running far more than $10,000 dollars. Although these fees are usually added to the homeowner’s amount owed, lenders end up paying for this out of pocket if the home is not saved.

Cost of Eviction

Of course, the eviction process also ends up costing the lender. Banks often have to pay attorneys even more to make sure the former homeowner is removed from the property. These costs, which may include more legal fees and filing fees, will be out of pocket fees as well.

Property Damage

Property damage often occurs to properties during or after foreclosure, which becomes costly for lenders as well. During foreclosure, homeowners have been known to mistreat homes, stripping, gutting or vandalizing the home. Banks end up paying for repairs out of pocket. Sometimes damage to the property occurs after the foreclosure has taken place as well. Homes often fall into disrepair when sitting abandoned.

Previous conditions may get worse and new conditions may occur due to weather and deterioration. Homes may also become targets for thieves or squatters, which can lead to more damage to the home. Lenders may have to compensate by lowering the real estate price on the home or they may have to pay for the repairs needed before selling.

Property Maintenance

In some cases, banks may choose to keep the property maintained and cleaned to try to avoid allowing the home to fall into disrepair. Some banks forgo this cost, but paying for routine maintenance can help to keep their sales price from deteriorating further. However, if they choose to maintain the property, this money comes out of the lender’s pocket, costing them even more.

Property Taxes

Lenders have to keep up with local property taxes on a home to avoid losing the property to tax foreclosure. Although non-owner occupied homes often have lower taxes, taxes still need to be paid for each day the property is owned by the bank. When the bill is due, this is another out of pocket expense that lenders must pay.

Homeowner’s Insurance

Banks usually receive a good deal on property insurance, especially compared to what many homeowners pay. However, this insurance still must be paid for by banks, even though costs may be kept in house if the lender owns a company that provides homeowner’s insurance.

Sales Commissions

In most cases, lenders list foreclosure properties with a local real estate agent. If the home is sold, the bank will have to pay commission to the broker, which once again reduces the proceeds made from the sale.

These are some of the costs lenders may face when a property goes through the foreclosure process. As lenders realize how much foreclosures actually cost, they have become more receptive to short sales. Even though they may lose money on the amount owed when they allow a short sale to occur, lenders still can save $40,000 to $50,000 on the home in the long run when going this route.

Next: Chapter 5: Credit implications for short sale sellers

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