For months pundits have openly debated whether the stimulus money invested in the various financial companies actually would trickle down to the consumer or property owner. Over the past year approximately 850 billion has been made available by the Federal Government to financial institutions in an attempt to avoid a total collapse of our financial markets. A few stories have seen publishing daylight about the abuses from notable insurance and finance companies (federal funds used for lavish vacations, bonuses, etc.); however, most of the funds have been used to shore up the banks balance sheets, alleviate cash flow hurdles, cover bank losses, and in part to cover mortgage defaults. The question has been raised by many regarding how much of this money will actually trickle down to the consumer who is overwhelmed by a loss of equity, rate adjustments, unemployment and a deepening recession? Only time will tell how effective the Feds stimulus package worked in "softening" this financial meltdown for the Nations homeowners.
Several components of the Feds bank stimulus package are intended to protect homeowners and provide them with some level of protection from losing most people's largest asset - their homes. The "Home Affordable Modification" program is at the epicenter of Obama's stimulus plan for homeowners. This program allows homeowners to modify their existing mortgage (assuming several criteria are meet) to reduce their payment and thus provide financial relief. Banks, in turn, are obligated to provide an aggressive loan modification program. This is intended to prevent the average American homeowner from losing their property via foreclosure.
In a parallel move, the Feds have encouraged lenders to "delay" processing foreclosures (REO moratorium). A huge release of bank REO properties would result in a further reduction in the median price in markets "hit" the hardest - i.e., California, Florida, Nevada, Michigan and Arizona. A further market erosion in the median home prices will have a devastating effect on the Nation's recovery. These "voluntary moratoriums" were originally put in place in the fall of 2008, and have been extended several times since. These moratoriums have allowed the real estate market to catch its breathe; and allowed the lenders to rewrite thousands of loans, etc.
On the other hand these moratoriums have caused bank foreclosures to stock pile for some date in the future. At this time there are over 135,000 delinquent properties going through the foreclosure process in California since the first quarter of 2009. This number continues to climb with each passing day. The number and potential effect on California real estate is mind numbing. So what are the banks doing to solve this mess?
Well they are actually attacking the problem on several fronts. First the loan underwriting guidelines and requirements have changed significantly preventing "questionable borrowers" from getting loans. Next they have implemented an aggressive "loan modification" program to help borrowers in trouble, but who are not entirely wiped out (borrower and property must meet minimum threshold requirements). The moratorium on foreclosures have allowed the market prices to stabilize somewhat by reducing inventory levels - especially in the lower end of the market. In addition, lenders have been encouraged to approve a greater number of short sales (sales where the banks take less than what is owed on the property).
This short sale emphasis is meant as a last ditch solution for homeowners without any other option but foreclosure. Which in this market (i.e., Long Beach being a representative sample of S. CA) short sales and other troubled properties constitute 47% of all closed sales in June; 43% of all pending sales (currently); and 35% of all current active listings. Specifically in June (Long Beach only) there were 236 closed single family home sales, and of this number there were 112 troubled properties closed (defined as REOs and short sales single family homes only NOT including condos). That constitutes a huge percentage! Remember historically REO (bank owned properties - "real estate owned") properties run less than 1% of the market nationwide. This tells me that banks have substantially increased the number of short sale approvals.
Last year at this time only 25% of all short sale applications were being accepted by lenders. That means that 75% of all short sales failed to close escrow! There has been a substantial increase in short sale approvals, while at the same time banks are stream lining their short sale process making it slightly easier to work through their system. A short sale offers homeowners who for whatever reason don't qualify under the "Home Affordable Modification" program (of which there are several "qualifiers") another solution short of foreclosure to resolve their issues. So in an "indirect" way the short sale has become another tool for homeowners to take advantage of the Federal mortgage stimulus package.
Actually the Feds as a part of the stimulus package has strongly encouraged all lenders to approve more short sale transactions. The way that has occurred is by pouring billions of dollars into banks and in the market specifically earmarked for short sales. In addition, the Feds have provided specific goals with broad guidelines for banks to stream line their short sale processes. The money earmarked for short sales bridges, in part, the difference between the outstanding mortgage balance and the amount paid at closing. The entire loss (the actual short fall) will not likely be covered by the stimulus package; however, banks acknowledge that a short sale ultimately is better for the bank than a foreclosure. Lenders stand to lose significantly more money in foreclosure due to holding costs, deferred maintenance, tenant cash-for-keys, marketing costs, and potential market price depreciation (further erosion in market prices), than if they accepted the exit strategy offered by a short sale transaction. Besides we all know from Economics 101 that a dollar today is worth more than a dollar tomorrow.
So in a tangible way short sale transactions may be the unsung hero after loan modification which will be beneficial for all parties - including homeowner, lender, secondary markets, Federal agencies, Fannie Mae, Freddie Mac, and the economy as a whole. Who would ever guess a year ago when agents, buyers and sellers alike struggled with getting a short sale approved that it would come full circle?
Posts
