Short Sales…will they become less of a headache?

The biggest mystery to me over the last eighteen months was why banks weren’t more receptive to the ‘short sale’ process. Studies have shown that it costs the bank more money if a property was foreclosed upon than if they accepted a ‘short sale’. For homeowners, a ‘short sale’ makes much more sense for several reasons:

• There is a much higher chance that the deficiency judgment could be negotiated in a short sale versus a foreclosure.

 • A short sale would have less of a negative impact on the homeowner’s credit rating.

• The homeowner would have at least some control over the timing of their relocation to new living arrangements.

• A ‘short sale’ would allow the homeowner to leave with dignity.

So, if it would be better for both the bank and the homeowner, why were more ‘short sales’ not completed? A recent research study by The National Consumer Law Center (NCLC) has uncovered the mystery behind this dilemma. In order to understand it, we must first look at the differences in the banking industry over the last ten years.

In the past, the banks used to process the loan (take the application, put together the file, etc.), lend you the money, and also service the loan (send the bills, make collection calls, follow-up, etc.). Over the last eight to ten years, the lending of mortgage money has shifted. First Wall Street and then the federal government became the primary lender in the mortgage sector. But, neither Wall Street nor the government had any interest in processing or servicing the mortgage. Mortgage companies continued to process the loans, but a new industry was created to fill the need for the servicing of these loans. So now, a separate and independent entity is servicing a tremendous portion of existing mortgages.

Just ten years ago, 37.4 percent of all mortgage loans were securitized (thus requiring a servicing company). Today, that number is 79.3 percent. The NCLC study shows that the reason more houses are not available for ‘short sales’ is because these servicing companies actually collected more fees for a foreclosure than they did for a ‘short sale’. Actually, the servicing company would lose money if they did a ‘short sale’. Since they were now in charge of making that decision, it was obvious why foreclosure was the alternative of choice.

The federal government realizing that modifications were not the answer and banks realizing that the foreclosure process was too expensive, have agreed to change the fee structure to make it more profitable for the servicing companies to lean toward ‘short sales’.

It’s always about the money. This situation was no different. Now that the money will flow to the companies that choose the ‘short sale’ alternative, watch how much easier the ‘short sale’ process will become.

MBS & Wall St.

The anchor/pundits on CNBC (Larry Kudlow I’m talking about you) and other TV business shows have been blathering on all week about how the government needs to wean itself from not only Fannie and Freddie but the mortgage market in general. I got news for you, Larry: the private label MBS market ain’t coming back any time soon and when it does it will be for low LTV jumbo mortgages with high FICO scores. Wall Street will never again securitize subprime loans unless there is some type of government backing on them or tons of mortgage insurance or something similar.