Over the last year we have seen both the Federal and State governments trying to stem the tide of property foreclosures via moratoriums and loan modification programs. This has resulted in slightly slowing down the escalating trend of home foreclosures. For the few that can qualify for a loan modification only 30% have been successful. Thus many of these failed loan modification homes end up being foreclosed upon.
Also as a result of these government and bank programs, we have seen a significant increase in Short Sales. Over the last six months we are averaging about 25 Short Sales a month. This is a result of some of the banks having more aggressive Short Sale programs. Banks that actually still hold the mortgages they made, are in a much better position to address the market. In comparison, banks that have sold off their mortgages to investors are having a much harder time making Short Sales work.
For example, Bank of America, Wells Fargo, Citi Bank, and Chase are the hardest banks to work with in a Short Sale. If you are lucky enough to be successful with them, it can take months and over a year to finalize a Short Sale. While some of the smaller banks can get a Short Sale done in a matter of weeks. Again in most cases these smaller bank are still holding the loan. So this is something to consider if you are buying a Short Sale property. The bottom line, there is a risk in waiting for Short Sale to happen while you pass up other properties on the market. But the risk is lower when working with the smaller banks. No doubt Short Sales will be a larger factor in our real estate market in 2010 as seen the graph below
One last thought, whether the banks sells a property via foreclosure or short sale action, they will be able to write off the loss from the property. A good number homeowners are walking away from their homes due to negative equity even though they can afford the payments. These homeowners are not willing to pay a mortgage on a home that is now worth half the value of what they paid for just several years ago. It does not make sense to them to pay on a mortgage on a house that might be worth what they paid for in 20 years.
Another solution to this problem is instead of the current loan program that changes the interest rate and/or term of the loan, it would make more sense for the banks in some cases to readjust the mortgage closer to the market value of the home. The bank will would still get to write off the loss on the original mortgage and not have to go through the additional expense of selling the home via the foreclosure route. The good news is that some smaller banks are making plans for such a program. This would also help add some stability to the real estate market by reducing the influence banks are having on the market via foreclosures and bank owned property sales. Most importantly it also slow down the downward spiral of home values.