Uncle Sam has embraced cash-for-keys as part of its initiative to streamline the short sale process. Can we expect to see many more successful short sales soon?
Irvine Home Address … 58 WOODLEAF Irvine, CA 92614
Resale Home Price …… $359,000
Stop your stalling,
And just give me more than you should,
Before we're all in
The same mess I knew we would;
I will not call you,
'Cos I know he'll answer the phone;
There's something stunning
About the way we lie till it's gone.
Snow Patrol — Steal
Now that the US taxpayer is absorbing the losses from the US housing and mortgage markets, someone in Washington has decided it is more cost effective to pay everyone off at short sale rather than forcing foreclosure. More transactions may be coming if short sales are expedited, and that is probably a good thing.
By DAVID STREITFELD
Published: March 7, 2010
In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.
This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.
More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.
For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.
Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser.
Reach for your wallet; the government is streamlining….
Cash for Keys from Uncle Sam
To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash around.
Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”
There it is; Uncle Sam is paying people to pack their stuff and get out of the taxpayer's property — and it is the taxpayer's property given that the taxpayer is the only party putting money into the deal to pay everyone off. Didn't we all know it would come to this? How much longer before Uncle Sam gives up on this loan modification crap and cranks up the foreclosure meat grinder?
The owners of second mortgages must be thrilled with this program. The second mortgage is worth practically nothing when the property is underwater. Investors who expect little or nothing are getting a significant payout from Uncle Sam. I assume Goldman Sachs bought every underwater second mortgage in the country leading up to this policy change.
Cutting out flippers
This program will succeed by cutting out the cash market at foreclosure. Short sales are resales and subject to financing, so prices are higher and loss recoveries greater — at least in theory.
Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.
For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.
For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.
I think the statement about being better for a borrower's credit rating is dubious. How much better is it to stiff a lender for $50,000 if you do it on good terms? Short sales often come with some kind of long-term repayment agreement or acknowledgment of debt. Rarely is it a clean break.
The last statement about benefiting the community is true. Empty houses serve no one. A short sale keeps the property occupied and maintained and keeps continuity in neighborhoods and communities.
With the large amount of distressed inventory, expediting short sales will become a necessity. If every distressed property goes through foreclosure and remains empty for a significant time, everyone involved loses, except perhaps the trustee sale flippers who will be asked to clean up the mess.
Irvine Home Address … 58 WOODLEAF Irvine, CA 92614
Home Purchase Price … $490,000
Home Purchase Date …. 1/24/2006
Net Gain (Loss) ………. $(152,540)
Percent Change ………. -26.7%
Annual Appreciation … -7.3%
Cost of Ownership
$359,000 ………. Asking Price
$12,565 ………. 3.5% Down FHA Financing
5.01% …………… Mortgage Interest Rate
$346,435 ………. 30-Year Mortgage
$74,419 ………. Income Requirement
$1,862 ………. Monthly Mortgage Payment
$311 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$30 ………. Homeowners Insurance
$362 ………. Homeowners Association Fees
$2,565 ………. Monthly Cash Outlays
-$308 ………. Tax Savings (% of Interest and Property Tax)
-$415 ………. Equity Hidden in Payment
$25 ………. Lost Income to Down Payment (net of taxes)
$45 ………. Maintenance and Replacement Reserves
$1,911 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$3,590 ………. Furnishing and Move In @1%
$3,590 ………. Closing Costs @1%
$3,464 ………… Interest Points @1% of Loan
$12,565 ………. Down Payment
$23,209 ………. Total Cash Costs
$29,200 ………… Emergency Cash Reserves
$52,409 ………. Total Savings Needed
1,267 Sq. Ft.:
$283/ Sq. Ft.
Property Type: Residential, Condominium
One Level, Other Style:
Property has newer flooring, newer paint and all neutral colors. Master bathroom has been completely remodeled. Great location. One level with great floor plan. Quick cleaning and ready to move in! Very nice – Buyer's will be happy for years to come.
What does the photo above tell you about the occupant?