Anti-Foreclosure Program Aims To Spur 'Short Sales'
Nearly 5 million people around the country are seriously delinquent on their mortgages. Some may be able to save their homes if they can negotiate a loan modification with a lower payment from a lender. But others simply don't have enough income even for that.
For many of those troubled homeowners, a "short sale" is a better alternative than foreclosure.
Here's how a short sale works: A bank agrees to sell a house at the current market value without foreclosing, allowing the owner to simply walk away because the bank forgives the rest of the debt.
The federal government is launching a new program Monday to encourage more short sales. The Treasury Department will offer lenders and homeowners incentives totaling more than $3,000.
A Short Sale In Boston
On a busy street in Boston's Dorchester neighborhood, real estate agent Curtis Howe walks up to a brick townhouse that was rehabbed about 10 years ago. It's in a part of town where properties got way overvalued during the housing bubble. Howe says the outstanding mortgage was about $540,000; the property eventually sold for $275,000 in a short sale. That is a huge drop in value, and the lenders who were on the hook for that loan lost a ton of money. But there's still an upside for lenders.
"When a property goes into foreclosure and becomes vacant, it's vandalized, you have plumbing issues if the property isn't winterized, and there's nobody to maintain the property," Howe says. And, he adds, a short sale typically gets a higher price than a foreclosure.
A Complicated Short-Sale Process
Banks can cut their losses by doing short sales, and homeowners can do less damage to their credit. A homeowner also avoids the ordeal of a foreclosure, which can include eviction.
But often obstacles can derail short sales or make the process drag on. With the house in Boston's Dorchester neighborhood, Howe says, "It was a long process and it was just a little less than two years to get short sale approval and sale."
Laurie Maggiano, a director of policy at the Treasury Department, says: "There have been many, many delays and lots of complications with the short-sale process."
Some people don't like the idea of more bailouts for banks — or for homeowners, some of whom bought houses that they just couldn't afford.
"We're not here to make moral judgments about borrowers; we are here to stabilize the mortgage market," Maggiano says. She says the major cause of default and foreclosure right now is unemployment. Short sales, she adds, are less damaging to the housing market than foreclosures because there aren't vacant homes blighting neighborhoods.
Second-Loan Woes
Nicolas Retsinas, a housing economist at Harvard Business School, says second loans such as home-equity loans have been a major problem for short sales. That's because banks that made those home-equity loans have to sign off on any short sale, and they can end up squabbling with the first mortgage holder about who should get how much money.
"They can try to capture and turn their power to sign off into some kind of modest payoff for that second mortgage," Retsinas says.
Meanwhile, mortgage industry executives are talking about how big the government program might become.
"We'll have to get into the summer months to see how this takes off," says John Jelavich, a vice president with PMI Mortgage Insurance Co. "But it could be just another program out there."
Jelavich says one challenge will be to make sure that the homeowners who get to do short sales are people who really can't afford their homes. It shouldn't be a program, he says, for people who could afford to keep paying but want a way to sell their house if they owe more than it's worth.
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STEVE INSKEEP, host:
Nearly 5 million people in the United States are seriously delinquent on their mortgages. Some may be able to save their homes with a lower interest rate, but others simply do not have enough income even for that. For many of them, there's a better alternative than foreclosure, what is called a short sale. And today, the government is launching a new program to try to get more short sales happening.
NPR's Chris Arnold reports.
CHRIS ARNOLD: On a busy street in Boston's Dorchester neighborhood, real estate agent Curtis Howe is walking up to a brick townhouse.
Mr. CURTIS HOWE (Real Estate Agent): The property was rehabbed about 10 years ago. So the inside wasn't in bad condition.
ARNOLD: But this is a part of town where properties got way overvalued during the housing bubble - way overvalued.
Mr. HOWE: The outstanding mortgage was 545,000 or 540, somewhere around that number, and the property eventually sold for 275.
ARNOLD: Wow.
The lenders who were on the hook for that loan lost a ton of money. In this case, Howe sold the house through what's called a short sale. Basically, what that means is that the bank agrees to sell the house at the current market value without foreclosing, and the owner could just walk away. The bank forgives the rest of what they owe.
Mr. HOWE: But to explain why that's a better deal: When a property goes into foreclosure and it becomes vacant, most cases, it's vandalized. You have plumbing issues if the property isn't winterized. There's no one to maintain the property. The eventual sales value is a lot lower than a short sale.
ARNOLD: So the bank could get even less if they went to foreclosure.
Mr. HOWE: Most cases, without question, that's the result.
ARNOLD: So banks can cut their losses by doing short sales. And the homeowners can do less damage to their credit, and they don't have to go through the ordeal of a foreclosure and having the sheriff evict them from their homes.
But the problem is there are often a lot of obstacles that can derail short sales - or make the process just drag on almost forever.
How long did it take to get the sale to go through?
Mr. HOWE: It's a long process. It was just a little less than two years to get short sale approval and sale.
Ms. LAURIE MAGGIANO (Director of Policy, Treasury Department): There've been many, many delays and lots of complications with the short-sale process.
ARNOLD: Laurie Maggiano is a director of policy at the Treasury Department. She says that starting today, the government is launching a new effort to grease the gears to get more short sales to happen. They'll be paying homeowners $3,000 to help motivate them and give them some money to start renting when they move out. Lenders can get up to $2,000 as an incentive. Now, some people don't like the idea of more bailouts, for banks or for homeowners, some of whom just bought houses that were way beyond their means.
Ms. MAGGIANO: We're not here to make moral judgments about borrowers. We are here to stabilize the mortgage market, and the major cause of default and foreclosure right now is unemployment.
ARNOLD: In other words, people who just lost their jobs in the recession. And Maggiano says short sales are less damaging to the housing market than foreclosures are. There aren't those vacant homes blighting neighborhoods, so they're better for the economy.
One of the big obstacles to short sales is that often, the homeowner doesn't have just one loan to deal with. They have a second loan, too - say, a home-equity loan.
Professor NICOLAS RETSINAS (Housing Economist, Harvard Business School): A major problem is the second mortgage holder.
ARNOLD: Nicolas Retsinas is a housing economist at Harvard Business School. He explains that banks that made these home-equity loans have to sign off to OK a short sale. And so they can end up squabbling with the first mortgage holder over who should get how much money, and that's one of the things that can just drag on and on.
Prof. RETSINAS: They can try to sort of capture and convert their power to sign off into some kind of modest payoff for that second mortgage.
ARNOLD: John Jelavich is a vice president with PMI Mortgage Insurance Co. He's been talking about the new program with lots of executives at banks and companies that manage home loans.
Mr. JOHN JELAVICH (Vice president, PMI Mortgage Insurance Co.): And it's still a bit up in the air in terms of their view on how big this program is. You know, we're just going to have to get into the summer months to really see how this takes off. It could be big, but it could be that it's just another program out there.
ARNOLD: Jelavich says that one challenge will be to make sure that the homeowners who actually get to do short sales are people who really can't afford their homes, and not people who could afford to keep paying, but who just want a way to sell their house if they owe way more than it's worth, and they're just looking to stiff the bank.
Chris Arnold, NPR News. Transcript provided by NPR, Copyright National Public Radio.
