Lenders Becoming More Open to Short Sales

Bankruptcy and loan modification may have taken the spotlight since the mortgage crisis, but recent studies suggest that short sales—a process through which lenders agree to sell the borrower’s home for less than the mortgage amount—may make more financial sense for both parties.

Borrowers were initially wary of short sales because they could not be processed fast enough to prevent foreclosure. Loan modification, which stopped the foreclosure proceedings, was a more popular option.

But as bad loans continue to weigh down lenders, many banks are now seeking faster ways to get rid of such accounts. Experts believe that short sales are the most viable alternative, and that the coming months could see a rise in these transactions as lenders become more cooperative.

The Treasury Department has already announced an incentive scheme for borrowers to work out more short sales. Although details have yet to be released, major lenders seem generally supportive. Bank of America management executive David Sunlin believes that a more systematic negotiation scheme could help steer the industry in the right direction.

At the Bank of America, Sunlin added, internal policies have been changed to make room for more short sales. Before the shift, the finance giant followed Fannie Mae recommendations in which second lien holders were given about 10% of the balance on second mortgages where the bank held the first lien. Recently, the bank has agreed to take 5% of the short sale proceeds on loans where it holds the second lien.

Studies have shown that short sales bring fewer losses to the lender, as most banks have to keep foreclosed properties for months before they can be sold. Homeowners are advised to involve their lenders early in the short sale process, which helps avoid delays from third-party investors.

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