For the first time, conditions exist for a rapid resolution of the huge “negative equity” problem that has been the major impediment to a housing recovery. The solution is contained in doing large numbers of “short sale swaps.” A “short sale swap” is where unrelated and distant neighbors, each heavily underwater, agree to “swap” (buy) the others home through bank approved short sales. This is now possible. The price is set at the latest assessed value. Many of the major players needed for this process to work now seem ready to accept it.
No Downward Effect on Home Prices
The major advantages are that in one swap, negative equity is erased from two homes and two good qualified homeowners are retained with equity again in their new homes. Best of all, the process has a zero effect on regional home prices as these transactions do not add to home supply or demand. This is not true of the usual “walk away – foreclosure event” which not only losses a current homeowner but adds another home for sale, which pressures regional home prices downward.
"Short Sale Swaps" Avoid the Big Risk - the Continuous Walk Away-Feedback Loop-Price Decline
It appears that some banks – at least in the heavily affected regions like Phoenix and parts of California – now see this as the only realistic solution to their problem. As I wrote in three previous articles (Is the Housing 'Walk Away' Crisis About to Start?, Is 'Foreclosure-Gate' Masking the Impending 'Strategic Selling' Firestorm? and Understanding the Housing 'Walk Away' Threat and Measuring Its Risk) the greatest risk at this time to banks is a triggering of a feedback loop, price decline. This is a “circle” of lower prices, where more negative equity produces more “walk aways” leading to lower prices, over and over. The last six months of price declines may already have started this process in some regions. As explained in the above articles, bank losses under a feedback loop price decline would become horrendous. Wide spread use of “short sale swaps” would prevent or impede this.
Taking the Bull by the Horns
Many homeowners and agents in the Phoenix area have already started to do “swaps.” What is needed is for a major real estate firm to see the financial potential of focusing on this as a full-time business for probably two years. The potential number of homes sales from this activity over two years would probably far exceed the totals from all other sales activitty combined. Thats because the swap is being done soley as a technique to get out from under negative equity, not because the new home is actually wanted or desired over their previous home. And with the high current number of extremely negative homeowners, millions are probably willing to do this.
The dynamic RE firm could run full page, city wide ads for underwater homeowners to attend educational symposiums on short sales. Attendance would be massive, especially in areas like Phoenix where over 50% of homeowners are underwater.
The firm would end up collecting the names of thousands of homeowners who now understand the process and its requirements and who perceive this as finally a way to restart their lives. The beauty is that the list is self-contained or “closed", meaning each person on the list is both a buyer and a seller and the only problem is matching them up. Many banks will now do this even though the homeowners are current on their deep underwater loan. They know the alternative is that if they don't, many will end up simply walking away and drowning the bank in more unsellable homes.
A major effort to push this forward would put a heavy dent in the negative equity issue and very quickly help turn the housing problem around, especially in the heavily affected regions of the country.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.