Easier Short Sales Could Speed Up Recovery

Posted by Jim DeBellis on May 25th, 2011

Treasury Secretary, Timothy Geitner, told Politico yesterday that the recovery of the housing market has “several more years to go.” Confirmation of what is obvious to most observers still begs the question of how we can fix it faster.

Some insiders are pointing more and more to short sales – selling the home for less than the mortgage balance owed to the lender – as a good way to reduce the growing inventory of foreclosed properties. The housing market would benefit with less blight from foreclosures on home values and homeowners would benefit with a lesser hit to their credit rating by avoiding foreclosure. Still, the process has been a difficult and uncertain one, with 40% of short sale offers never making it to closing.

While some big banks are taking steps to streamline the process, there are still stumbling blocks that keep many people from venturing into short sale contracts. Many take four to nine months and still fail. One thing that trips up a lot of short sales is the second mortgage. Most often in this underwater market, there is no equity to collateralize a junior lien, in which case the first mortgage holder will not want to give more than a few pennies on the dollar to to the second mortgagee, as they are already taking a loss. If the two parties can’t agree on a split, the deal will fall through.

Of course, many second mortgages don’t actually represent an investment in the home to the borrowers. Most often, they took out a lower interest second to pay off their cars, credit cards, and other high-interest debt. They would still have had to pay these bills if they never took out the second mortgage, so sometimes they agree with the bank to keep paying that loan in order to make the deal work.

Many real estate agents and buyers shy away from short sales because of the long and risky process. Any improvement (like more and easier short sales) that would keep some homes from falling into the boneyard of foreclosure would be a benefit to the housing market and help speed up the recovery.