Lenders prefer foreclosures, not short sales
While the recent halt in foreclosures gave defaulting homeowners some breathing
room and a glimmer of hope their lender might consider a modification or short sale, lenders are still reluctant to
concede a short sale in favor of foreclosure.
Historically, lenders have never preferred short sales for fear homeowners will
take advantage of them to cut their losses. A recent report found that 2% of annual short sales involve fraud,
costing banks around $300 million.
A 2009 change in accounting policy by the Financial Accounting Standards
Board (FASB) on foreclosures until the home is sold, while losses from a short
sale must be marked immediately.
Bank of America (BofA) has only processed 61,000 short sales nationwide in 2010,
compared to the millions of homes in foreclosure it services.
Clarion's take: Instead
of the “cat and mouse” game for short sales or foreclosures, banks need to focus on cramdowns if Californians are
to remain homeowners as desired by agents, builders and the government. Reducing principal to keep homeowners in
their homes is a far better solution than initiating the on-again, off-again short sale, or adding another
foreclosure or real estate owned (REO) property to the massive pile of destroyed homeownerships.
Blinded by total fear of declaring losses, lenders are stuffing more skeletons in
their already bursting closets of rising delinquencies (through 2013), shadow inventory (recorded notices of
default (NODs)) and delayed reporting of their insolvency. Instead of focusing on clearing out their patently
unmanageable profusion of foreclosures, banks are adding to it. They are unwilling to take a direct and immediate
principal reduction hit for the benefit of consumers, the nation’s housing policy and the greater real estate
market — all of which are partially to blame.
Foreclosures are necessary for fast, quick recovery — they are a fitting solution
for a default if they are actually completed, lest we wish to go the way of Japan in this financial crisis. Until
the government forces them to write down their loan portfolios to current market value and reduce mortgage
principal for underwater homeowners, prepare for your short sale requests to be absolutely denied on arrival. It
keeps lenders solvent; on paper, with paper.
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