Short Sales Get A Boost

November 21, 2009

Home sale transactions that are categorized as a "short sales" will soon become more frequent and popular. A new incentive program is planned that will make these sales more appealing to lenders, thus making them more cooperative in arranging such sales.

A short sale of a home is when the proceeds from the sale fall short of the balance owed on a mortgage loan secured by the property. In a short sale, the lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower (homeowner). This negotiation is all done through communication with a lender’s loss mitigation or workout department.

The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. The lender has the right to approve or disapprove a proposed sale. Extenuating circumstances influence whether or not lenders will discount a loan balance. They are usually related to the current real estate market and the borrower’s financial situation.

The incentive plan, recently proposed by the Treasury Department, would provide subsidies of up to $2,500 (total) to lenders and servicers who accept a short sale. It’s a way to encourage short sales as a means of clearing a lender’s excess inventory and reducing the number of foreclosures.

The fees are designed to help compensate lenders for the extra time and effort required to process a short sale, according to a report from John Burns Real Estate Consulting, a research and consulting firm. It also motivates lenders to be more cooperative, and homeowners to leave their property in good condition. "Presumably, the Treasury is trying to help facilitate transactions that will result in less loss to the lender than in the case of a foreclosure," the Burns report noted.

In the past, short sales have not been popular with many lenders, particularly with proposed sales where the purchase price was below the currently appraised value of the home. And many Realtors have been reluctant to deal with the extra processing and time delays in short sale transactions. These sales can sometimes take 4 to 5 months to close. However, the new incentive plan will certainly focus more interest in and create more activity with short sales, and make them more feasible for lenders.

Posted in Real Estate