A recent stat shows that 23.3% of all US homes are underwater, meaning that the owners of these properties owe more on their home than what it is actually worth. If these homeowners need to sell, they generally have to do it by means of Short Sales. Unless they have reserves of Cash stashed away, which thy usually don’t, this is about the only option to avoid foreclosure.
Because of the high numbers of short sales, banks are losing a ton of money. In my recent America First Credit Union annual newsletter, it was made apparent that the 2009 loss from bad loans was substantially worse than the year before.
Mortgage Insurance was created to insure banks losses from default home loans. However, the Mortgage Insurance providers are going out of business because they never anticipated losses would be this bad.
In effort too salvage some money, and make up for the lack of funds covered by mortgage insurance, Bank of America is attempting to collect promissory notes from the owners requesting short sales. One of our Cornerstone Agents is working with a client who owes more than $300,000 on a house. They currently have a short sale offer on it for $200,000. The bank is willing to approve the short sale, IF the owner will sign a 20 year promissory note for $55,000. This would give the default borrower a payment of about $250 for the next 20 years.
This is a good move by Bank of America, but the problem is that for borrowers like the one in this example, short sales are less appealing than just letting the home foreclose. At this point the borrowers credit is already shot, and the only thing they would be saving is the term “foreclosure” on their credit report. Is it worth $55,000 to avoid that term? Not for these borrowers.
From Bank of Americas standpoint, by not approving the short sale they are going to lose even more money by having to pay the legal fees associated with foreclosure. Then, after the foreclosure, they still have to sell the house at a price that is nowhere near worth what the owners borrowed against it.
While it is a good move to try and make the default borrowers more accountable, they have to do it in a way that will actually make sense. Making the guidelines too strict will just make things worse for all parties involved.