Banks and mortgage servicers are following Treasury Secretary Paulson’s marching orders. In "Treasury Sec. Paulson Rejects Systemic Approach to Foreclosures", I quoted Paulson saying:
“But let me emphasize that we do not need a system-wide solution for the vast majority of loans where a homeowner temporarily has negative equity.”
The servicers are holding to their
highest virtue – no undeserving homeowner shall be helped. The
servicers are sticking to their guns, no matter how much it gums up the
system and hurts mortgage investors as a whole.
The Wall Street Journal “Why Lenders Are Leery Of Short Sales”
reports that short sales typically result in a loss of 19% versus a 40%
loss in a foreclosure. Even with lender reluctance, short sales make up
18% of home sales. Buyers and their realtors are getting frustrated
waiting four to five weeks, only to have their offers rejected by
servicers. Subsequently, the properties rejected for short sale sell
for much less after foreclosure.
Fannie Mae (FNM) and Freddie
Mac (FRE) are starting to break away from the Paulson doctrine. They
are planning to release guidelines for the minimum short sale prices
for the mortgages they insure. This will allow realtors to filter out
lowball offers. The WSJ also reported that Lehman Brothers
(LEH) is “offering incentives in some cases for servicers to arrange
short sales or loan modifications.” But the Journal gave no further detail on Lehman.
Five hurdles were cited for short sales:
- Homeowners must prove they cannot continue meeting their payment obligation.
- The short sale cannot be between related parties. It must be an arm’s length transaction.
- Buyers must be able to qualify for financing.
- The servicer might need approval from the mortgage investors.
- The approval of any home equity or second lien holders is required. I addressed this in "Banks use Leverage to Force Home Equity Repayment" and "Power of 2nd Place".
The
case by case approval of short sales might enforce the moral hazard on
financially able borrowers, but the price of the lesson is far too high
for the lenders. If you assume only a small portion of short sales are
initiated by borrowers that can pay, the lenders would get a far better
overall return by letting a few “get away with it.”
Disclosure: Author is long FNM and FRE.
