Loan modifications are not working – so banks are moving towards short sales to solve the mortgage crisis

Diana Olick – Big Banks Move to Short Sales, but Will It Help Housing?

“Earlier this week a top executive at Bank of America told an REO conference in Dallas that the lender would be focusing more on short sales than ever before. At first hearing this, I assumed it was because of the government’s Home Affordable Foreclosure Alternative Program, which provides cash incentives to servicers and borrowers for short sales and also streamlines the process, but of course there’s way more to it than that. Said Bank of America exec, Matt Vernon, whose official title is National REO, Short Sale and Deed in Lieu Executive (his childhood dream title I’m sure), granted me an interview this morning, and was pretty clear as to why B of A is pushing these alternatives. The big difference, he says, is that BofA, as well as some other big banks, are changing the model from reactive to proactive. In other words, instead of waiting for a borrower or real estate agent to approach the bank with an offer for a short sale, they are using a “cooperative approach, with homeowner, Realtor and servicer on behalf of investor, working to move that property through the process. All three of the interested parties holding everything together,” Vernon explains. ”

Olick continues: “So the servicer sets a minimum value for a short sale and then the borrower and Realtor go out and find a buyer. When they do, the process then moves far more quickly because it’s already approved. Of course there’s always the financial incentive as well. With so many borrowers either falling out of or not qualifying for the modifications, a huge flood of properties are moving to REO (bank owned). A report from Clayton Holdings finds short sales cut risk severity by 13 percent more than REO sales. And in some states where the foreclosure process is more lengthy, short sale loss severities can be as much as 26 percent lower than REO loss severities. “I would say that’s generally accurate in what we see,” agrees Vernon. “It really comes down to time. The quicker you can facilitate the property moving.” The good news is, that will cut down on foreclosures. The bad news is that short sales, like it or not, are comps. They sell for less, and consequently bring down the values of properties around them.”