Short Sales: Necessary Compromise or Scamming the System?
I spent much of this week in Atlanta, which is currently one of the worst housing markets in the nation. Atlanta home prices are down 17 percent annually, according to the S&P/Case-Shiller Home Price Index, thanks to a glut of distressed properties.
Foreclosures are plentiful in Atlanta, and as in other highly distressed markets, investors are swooping in, some buying in bulk, to take advantage of the hot rental market. Another new trend helping to alleviate all the distress is short sales.
Short sales (selling the home for less than the value of the loan) are rising across the nation, and while they have yet to overtake foreclosure numbers in Atlanta, they are in fact up 120 percent from a year ago, according to RealtyTrac.
Knowing all this, I searched for a short sale specialist, and found Ben Hirsh, of Hirsh Real Estate Specialists. He does much of his work in foreclosure sales and has a contract with Fannie Mae, but lately short sales have been a growing part of his business.
“The short sale market is overtaking the REO (bank-owned) market,” says Hirsh, who still expects to sell at least 300 foreclosed properties this year. He notes a greater willingness among real estate agents, thanks to a greater commitment by banks to expedite the once-lengthy process. Fannie Mae and Freddie Mac just last month announced new rules requiring them to answer short-sale requests within thirty days. Hirsh is skeptical that that will happen:
“The banks can make all the rules they want, but the banks are too large to be that nimble. And you can’t really blame them. They have millions of assets all around the country. You expect them to turn around in 30 days and give an answer on whether they are going to forgive the money you owe them? I wish that would happen in 30 days, but that’s my dream world.”
Hirsh did say, however, that getting approved for a short sale, while time-consuming, does not require much hardship, if any. That struck me as strange, since short sales are supposed to be a foreclosure alternative. The nation’s five largest banks get credit for doing short sales as foreclosure alternatives in the $25 billion mortgage servicing settlement they recently signed.
“We do a lot of short sales where there truly is not a financial distress, but there may be a willingness on the part of the seller to walk away from that home,” Hirsh said.
Twelve million borrowers nationwide currently owe more on their mortgages than their homes are worth, according to John Burns Real Estate Consulting, with just about half of those borrowers still current on their payments. Negative equity puts borrowers at greater risk of walking away from their homes, according to several government studies. Short sales would therefore save the banks money by averting foreclosures by walkaways.
But is that the real purpose of a short sale? Some say the banks are to blame for the housing crash and mass home-price depreciation, and therefore they should pay for all of our losses. Others blame borrowers for playing loose with credit and buying far more than they could afford, using their homes as ATMs and turning a blind eye to the fact that home prices can go down as well as up. Are short sales the compromise? The bank loses money and the owner loses the home without the credit hit? Everybody loses?
I was about to buy that compromise, until Hirsh told me about some of his clients. They are short-selling their homes and turning right back around and buying new homes — and here’s the clincher: they’re getting mortgages. One is even building a new home!
These borrowers have the wherewithal to make their monthly payments on their underwater homes but choose not to, because they know they won’t make their equity back any time soon. They also see that they can now buy more home for less money, given how low home prices have fallen. They can get in at the bottom, rather than pay what amounts to rent on their current homes. In other words, they’re in a position to make more money by walking away from their debt and letting their lender eat the loss.
I’m no bank apologist, but is that fair? You tell me.