According to a new article on Bloomberg by Prashant Gopal, banks have begun to incentivize troubled homeowners to short sell their homes by offering them sizeable checks:
“Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.
Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some case providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York”.
A short sale is when a homeowner sells their house for less than they owe on the mortgage, and the lender forgives the outstanding balance on the loan. For instance, a homeowner may have a home that is worth 200,000 but has a 250,000 mortgage due to declining home values. The homeowner might be able to petition the bank to do a short sale, and sell the house for $200,000. The bank would then forgive the $50,000 remaining on the mortgage (although the homeowner may be liable for taxes on the forgiven debt). The reason a bank would approve a short sale is because it is a way to mitigate losses. Often a short sale costs a bank less than a foreclosure, according to the Bloomberg article, losses are 15 percent lower on short sales than on foreclosures.
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