Dec. 4 (Bloomberg) -- Drew Schlosser tried for two years to sell his three-bedroom Punta Gorda, Florida, waterfront condominium for less than he owed on its two mortgages. The deal only went through last month when Wells Fargo & Co. agreed to take a $165,000 loss on the loans.
Even after he had an offer of $155,000 for the property, it took five months for the San Francisco-based lender to approve the purchase, a so-called short sale, in which the bank accepts less than the balance owed on a property. Schlosser said earlier offers had fallen through as bidders lost faith the bank would take less than the $320,000 in two mortgages.
“It was just kind of a mess,” said Schlosser, 31, a market research company director living in Estero, Florida. “You really have to get buyers who are patient.”
Banks are beginning to go along with short sales in increasing numbers, three years into a U.S. housing slump that pushed the economy into a recession and cut resale values by 30 percent from the peak in July 2006. Short sales tripled to 40,000 in the first six months of 2009 from the same period a year earlier. Yet for each short sale, there were 25 foreclosures started or completed in the first half of this year, according to data from the Office of Thrift Supervision and the Office of the Comptroller of the Currency.
“It’s really finally dawning on banks that they’re better off with a short sale,” said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles. “I think banks were in denial.”
Obama Pressure
Wells Fargo, Bank of America Corp. and JPMorgan Chase & Co. this year have hired and trained more staff, developed software systems for expediting short sales, and increased marketing of short sales to delinquent borrowers.
Banks are increasing such sales under pressure from the Obama administration and lawmakers who criticized them for favoring foreclosures and delaying short sales, Green said. Lenders and loan servicers also stand to receive up to $2,000 in incentives to close short sales under a Treasury Department plan unveiled Nov. 30.
“Judging by how slowly the modification plan is up and running, it doesn’t lend confidence this is going to jump start things,” Mark Zandi, chief economist with Moody’s Economy.com, said in a phone interview. “They’re saying the right things, but nothing so far suggests it’s going to work in a measurable way.”
The increase in banks agreeing to take losses on mortgages is helping some home buyers and real estate brokers.
‘Lucky Deal’
Pat Meislik, 63, started looking for a house in San Diego in March and said she felt locked out of the California market until short sales in her price range became available.
“There were times when I had looked at homes before and could only afford a condo,” said Meislik, an accountant and financial analyst.
Meislik closed on a three-bedroom “fixer upper” for $280,000 in May. “By the time it ended I felt lucky.”
Lender Countrywide Financial Corp., now part of Bank of America, lost about $150,000 on the $406,000 loan to the previous owner, said Meislik’s realtor Deborah Reed. Wells Fargo settled the second $47,252 mortgage on the home for less than 10 cents on the dollar, she said.
“The tide is turning,” said Reed, who works at Coldwell Banker in San Diego, where the price of a single family home has dropped 38 percent since the peak, according to the S&P Case- Shiller Home Price Indices. “All of a sudden the banks are being more cooperative.”
More Short Sales
Reed said she completed four short sales in the past four months and the banks agreed to as much as $400,000 in losses.
Lenders have been reluctant to do such sales because they didn’t have procedures for employees to approve a financial loss for the company, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana.
“A short sale requires somebody to stick their neck out and make a decision,” said White, an expert in consumer law and bankruptcy. “There are not good structures in place to incentivize losses.”
Bankers also have been slow to sign off on short sales because homeowner associations, mortgage insurers and second- lien holders may not agree to the terms of the deal, said Michael Frantantoni, vice president of single family research at the Mortgage Bankers Association.
Loan Modifications
The first choice for lenders has been to try to keep borrowers in their homes, offering loan modifications as an alternative to foreclosure, Frantantoni said. More than half of the modifications of delinquent mortgages re-defaulted within a year, according to a Sept. 30 report by the Office of the Comptroller of the Currency.
“The single biggest problem was the lack of a vehicle or mechanism at most banks to handle short sales,” said Walter Molony, a National Association of Realtors spokesman. “You could say they were shortsighted in dealing with the problem.”
Pressure is building to approve short sales as the number of delinquent mortgages has grown to 3.2 million and an estimated 7 million foreclosures loom in the next two to three years, according to Irvine, California-based RealtyTrac Inc., which compiles and sells U.S. mortgage delinquency data.
New Treasury Department guidelines for foreclosure alternatives scheduled to take effect in April 2010 will require lenders to consider borrowers for a short sale on their primary residence 30 days after missing two consecutive payments on a modified loan or after the borrower requests a short sale.
Treasury Plan
The Treasury Department would pay up to $1,500 for a homeowner to relocate, $1,000 to loan servicing companies that accept a sale and a maximum of $1,000 to help settle a second mortgage or subordinate lien. A lender must agree to release the borrower from all liability for repayment for the mortgage, under the Treasury plan.
In July, Wells Fargo began mailing notices to delinquent borrowers advising them that short sales might be an option to avoid foreclosure.
“When we determine that a loan is not affordable for the customer -- either because a modification was denied or failed - - we obtain the value of the property, run it through our loan decision tool and then send a letter to the customer advising them of our short sale program, including the short sale price we are willing to take on the property,” Debora Blume, a spokeswoman for Wells Fargo Home Mortgage said in an e-mail.
‘Pick a Pay Loans’
Wells Fargo is focusing on delinquent borrowers in Florida and California homeowners with “Pick-a-Pay” loans originated by Wachovia Corp., Blume said. Wells Fargo acquired Wachovia in December 2008 and owns the “Pick-a-Pay” loans outright, said J.K. Huey, the bank’s senior vice president overseeing short sales and bank-owned properties. That allows the company to approve a short sale without consulting investors or parties that can hold up transactions.
“Pick-a-Pay” mortgages have among the highest rates of negative equity, because borrowers could select their monthly payments, often paying less than the interest, with the difference added to the principal. That formula means that total loan debt was increasing at a time property values were falling.
Wells Fargo held $87.8 billion of such loans as of Sept. 30, 74 percent of which have the potential for the home’s value to fall below the amount owed, Howard Atkins, the company’s chief financial officer said on an Oct. 21 earnings call. As of Sept. 30, Wells Fargo had modified 43,500, or 22 percent, of the distressed loans to reduce borrowers’ payments, Atkins said.
Reaching Out
JPMorgan doubled the number of staff trained to handle short sales after adding 5,000 people since Jan. 1 to deal with distressed mortgages, said Thomas Kelly, a spokesman for the New York-based bank’s home lending division.
Chase services 10.3 million mortgages worth $1.4 trillion, according to Kelly. Of its portfolio, Chase reported 422,000 loans more than 60 days delinquent, about one third of which were in loan modification programs, according to a Nov. 10 Treasury Department report on the Obama administration’s Making Home Affordable Program.
“We’re reaching out to people who are struggling with the Obama loan modifications or our own,” Kelly said. “Approaching customers is a very recent phenomenon.”
Bank of America, the nation’s largest loan servicer, had one of the lowest loan modification rates, with 14 percent of problem loans in trial workout plans as of Oct. 31, according to the Obama Administration.
The Charlotte, North Carolina-based bank started a “cooperative short sales” program in October and may close its first short sale through the program this month, said Dave Sunlin, senior vice president for foreclosure and real estate management.
Pay-Option Mortgages
Many are borrowers with pay-option adjustable-rate mortgages issued by Countrywide Financial Corp., Sunlin said. BofA bought Countrywide, once the nation’s largest mortgage originator, for $4 billion in stock in 2008.
Short sales benefit a neighborhood because they clear out stagnant properties that may have an adverse effect on values, said Sean Shallis, a senior real estate strategist with Weichert Realtors in Hoboken, New Jersey. Shallis has one home with bank approval for a short sale and three others waiting approval on the same street in Jersey City with views of the Manhattan skyline.
“In every case we had multiple offers from people who had plenty of money to put down,” Shallis said. “Americans are out there still buying homes and trying to move it along.”
Cutting Losses
Short sales also help the bank, because foreclosed properties lose more value when they are vacant or a homeowner vandalizes a house on the way out, Sunlin said.
“We typically expect a 10 to 15 percent decrease of loss severity with a short sale,” Sunlin said.
Losses on prime loans going through the foreclosure process averaged 49 percent versus 34 percent for a short sale as of Oct. 1, according to a Nov. 10 report by Laurie S. Goodman, senior managing director of Amherst Securities Group LP. For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale, Amherst reported.
“The loss severity of short sales is lower but it’s not low,” Goodman said.
For a borrower’s credit history, a short sale is typically reported as “settled” and considered as severe as a foreclosure, said Maxine Sweet, vice president of public education for Experian PLC, the world’s largest credit-reporting company. The impact of a short sale on a credit score is similar to that of a foreclosure. It may drop a credit score of 780 to 620, according to Minneapolis-based FICO Corp.
Hardship Letter
For sellers like Drew Schlosser, who bought 10 properties in Florida as investments during the housing bubble, getting a short sale was a relief even if the process was difficult.
“They don’t agree to do it because you’re upside down,” Schlosser said. “If they think you can pay for it they’re not going to let you out of it.”
Last Updated: December 4, 2009 09:37 EST
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