By -
Feb 7, 2012
Banks, accelerating efforts to move
troubled mortgages off their books, are offering as much as
$35,000 or more in cash to delinquent homeowners to sell their
properties for less than they owe.
Lenders have routinely delayed or blocked such
transactions, known as short sales, in which they accept less
from a buyer than the seller’s outstanding loan. Now banks have
decided the deals are faster and less costly than foreclosures,
which have slowed in response to regulatory probes of abusive
practices. Banks are nudging potential sellers by pre-approving
deals, streamlining the closing process, forgoing their right to
pursue unpaid debt and in some cases providing large cash
incentives, said Bill Fricke, senior credit officer for Moody’s
Investors Service in New York.
Losses for lenders are about 15 percent lower on the sales
than on foreclosures, which can take years to complete while
taxes and legal, maintenance and other costs accumulate,
according to Moody’s. The deals accounted for 33 percent of
financially distressed transactions in November, up from 24
percent a year earlier, said CoreLogic Inc., a Santa Ana,
California-based real estate information company.
Karen Farley hadn’t made a mortgage payment in a year when
she got what looked like a form letter from her lender.
“You could sell your home, owe nothing more on your
mortgage and get $30,000,” JPMorgan Chase & Co. (JPM) said in the
Aug. 17 letter obtained by Bloomberg News.
$200,000 Short
Farley, whose home construction lending business dried up
after the housing crash, said the New York-based bank agreed to
let her sell her San Marcos, California, home for $592,000 --
about $200,000 less than what she owes. The $30,000 will cover
moving costs and the rental deposit for her next home. Farley,
who is also approved for an additional $3,000 through a federal
incentive program, is scheduled to close the deal Feb. 10.
“I wondered, why would they offer me something, and why
wouldn’t they just give me the boot?” Farley, 65, said in a
telephone interview. “Instead, I’m getting money.”
Tom Kelly, a JPMorgan spokesman, declined to comment on the
company’s incentives.
“When a modification is not possible, a short sale
produces a better and faster result for the homeowner, the
investor and the community than a foreclosure,” he said in an
e-mail.
A mountain of pending repossessions is holding back a
recovery in the housing market, where prices have fallen for six
straight years, and damping economic growth. Owners of more than
14 million homes are in foreclosure, behind on their mortgages
or owe more than their properties are worth, said RealtyTrac
Inc., a property-data company in Irvine, California.
Foreclosure Holdouts
Short sales represented 9 percent of all U.S. residential
transactions in November, the most recent month for which data
is available, up from 2 percent in January 2008, according to
Corelogic. Bank-owned foreclosures and short sales sold at a
discount of 34 percent to non-distressed properties in the third
quarter, according to RealtyTrac.
As lenders shift their focus to sales, they are finding
that some borrowers would rather risk repossession while they
wait for a loan modification, according to Guy Cecala, publisher
of Inside Mortgage Finance, a trade journal. In a loan
modification, the monthly payment, and sometimes principal, is
reduced to help prevent seizure. Homeowners facing foreclosure
may live rent-free for years before they are forced out.
“That’s why the banks have got to pay the big bucks,”
Cecala said. “The real question is why is the bribe so big? Is
that what it takes to get somebody out of their home?”
Multiple Banks
Banks also pay a few thousand dollars to the owners of
second liens, whose loans can be wiped out by a short sale, to
encourage them not to block the deals.
While JPMorgan is giving the largest incentive payments,
other banks and mortgage investors are also offering them,
according to interviews with 12 real estate agents in Arizona,
California, Florida, New York and Washington. Lenders also
provide incentives on loans they service and don’t own when the
mortgage investor, such as a hedge fund, requests it.
JPMorgan, the biggest U.S. bank, approves about 5,000 short
sales a month. It generally offers $10,000 to $35,000 in cash
payments at settlement, real estate agents said. Not all of the
sales include incentives.
Borrowers also can receive payments from the federal
government’s Home Affordable Foreclosure Alternatives program,
which in 2010 began offering as much as $1,500 to servicers,
$2,000 to investors and $3,000 to homeowners who complete short
sales.
Quicker Resolution
For banks, approving a sale for less than is owed on the
home can cut a year or more off the time it takes to unload a
property. From listing to sale, the transactions took about 123
days on average at the end of last year, according to the
Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.
Lenders spend an average of 348 days to foreclose in the
U.S. and an additional 175 days to sell the property, according
to RealtyTrac. In New York, a state that requires court approval
for repossessions, it takes about four years to foreclose on a
home and then resell it, the company said.
Lenders can often afford to forgive debt, offer the
incentive and still make a profit because they purchased the
loan from another bank at a discount, said Trent Chapman, a
Realtor who trains brokers and attorneys to negotiate with banks
for short sales.
Chapman, who also writes a blog on TheShortSaleGenius.com,
said he’s heard about 50 homeowners who have received incentives
from lenders including JPMorgan, Wells Fargo & Co., Citigroup
Inc. and Ally Financial Inc.
Wells Fargo
“My guess is they want to get rid of bad loans,” Chapman
said. “If they short sale these types of loans, they have less
of a headache and have some goodwill with the homeowner.”
Wells Fargo, based in San Francisco, offers relocation
assistance of as much as $20,000 for borrowers who complete
short sales or agree to transfer title through a deed in lieu of
foreclosure “in certain states with extended foreclosure
timelines, including Florida,” Veronica Clemons, a spokeswoman,
said in an e-mail.
Bank of America Corp. sent letters to 20,000 Florida
homeowners as part of a pilot program, offering incentives of as
much as $20,000, or 5 percent of the unpaid loan balance, Jumana Bauwens, a spokeswoman, said in an e-mail. The program expired
in December and the Charlotte, North Carolina-based bank hasn’t
decided whether to introduce it in other states, she said. About
15 percent of the homeowners agreed to participate in the
program, she said.
Citigroup Offers
“The bank is pleased with the response,” Bauwens wrote.
“The state is experiencing higher foreclosure rates than other
parts of the country and is therefore seen as a viable market to
gauge incremental short-sale response and completion rates when
presenting homeowners with relocation assistance at closing.”
Citigroup offers $3,000 to most borrowers who qualify for
its program, but the “amount may increase based on the
circumstances of each individual case,” Mark Rodgers, a
spokesman for the New York-based bank, said in an e-mail.
“Investor programs have different guidelines for relocation
incentives, which we honor.”
Susan Fitzpatrick, a spokeswoman for Detroit-based Ally,
didn’t comment specifically on incentives when asked about them.
Borrowers typically can’t negotiate the incentives, which
arrive by mail, Chapman, the Realtor, said.
Tap on Shoulder
“It’s not really easy to identify the guidelines because
Chase doesn’t tell you, they kind of tap you on the shoulder,”
he said. “When I first saw it in January 2011, I thought it was
a joke or a typo. I was convinced it must say $3,000, not
$30,000.”
Offering enough for the homeowner to put down a deposit on
a rental apartment is reasonable, said Sean O’Toole, chief
executive officer of ForeclosureRadar.com, which tracks sales of
foreclosed properties. Giving tens of thousands of dollars to
delinquent homeowners sends the wrong message, particularly if
they got into trouble by running up home-equity loans during the
housing boom, he said.
“It may make sense for people to walk away, it doesn’t
make sense for them to get rewarded for doing it,” O’Toole
said. “It’s not the homeowner’s fault that house prices dropped
so dramatically, but they have already received months of free
rent, if not cash out.”
Cecala of Inside Mortgage Finance said he wonders whether
lenders are making big payments on properties with underlying
title problems. Evan Berlin, managing partner of Berlin Patten,
a real estate law firm in Sarasota, Florida, said
representatives of a large bank told him the incentives are
primarily given to borrowers when it doesn’t have the proper
paperwork needed to win its foreclosure case. He declined to
name the bank for publication.
Incentive Disconnect
State attorneys general across the U.S. began investigating
foreclosure practices in October 2010 following allegations that
the nation’s top mortgage servicers were using faulty documents
to repossess homes.
Berlin said his office negotiated about 400 short sales in
the past year and about a quarter included an incentive, ranging
from $3,000 to $48,000. In some cases, the payments aren’t
incentives at all because they’re offered after the borrower has
almost completed the short sale, he said.
“The idea is that this is relocation assistance,” Berlin
said. “But when you’re offering $48,000, obviously it doesn’t
cost $48,000 to relocate.”
Cooperation Sought
The size of the payment may have little to do with sales
price. JPMorgan gave one Phoenix homeowner $20,000 after she
sold her property in June for $32,000, according to Royce
Hauger, the real estate agent who represented the seller and
shared a copy of the settlement sheet with Bloomberg News. The
bank also agreed to forgive more than $70,000 in debt, she said.
Kelly, the JPMorgan spokesman, declined to comment on the
payment.
The homeowners are getting the money in exchange for their
cooperation, said Kris Pilles, a Riverhead, New York-based real
estate broker who represents banks, servicers and hedge funds
that own distressed housing debt.
Pilles is frequently dispatched to the homes of delinquent
borrowers to explain the benefits of avoiding foreclosure, he
said. His clients have paid as much as $92,500. In return, the
lenders expect the seller to clean the house before showings,
and trim the grass.
“Money talks,” Pilles said. “From the bank side, it’s
anything to initiate a conversation with someone who may not be
listening to them.”
