Today, the Big 5 in mortgage servicing are meeting in Washington to discuss alternatives to foreclosure. One of the controversial options under consideration is requiring banks to facilitate the short sale process.
Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial will get together to try to pound out a settlement that could range from $5 billion to $25 billion. The settlement revolves around federal and state investigations into shoddy or fraudulent foreclosure paperwork. Banks may now be legally compelled to let delinquent homeowners sell for less than the loan amounts owed.
In addition to requiring short sales, mortgage servicers may have to reduce the amount some homeowners owe on their loans. They would also have to dramatically change how homeowners are treated when they pursue a loan modification.
Short sales provide a quicker and more economical way for banks to dispose of distressed real estate. Short sales also help stabilize the real estate market by clearing out shadow pending inventory, millions of homes that are on the brink of foreclosure. Short sales can be used in situations in which borrowers are so underwater that the more costly and time-consuming process of foreclosure would seem to be the only option.
This is the first official meeting since attorneys general from every state in the nation and Justice Department officials threw down the gauntlet and presented the banks with 27 pages of demands calling for broad changes to mortgage servicing and how these transactions are handled.
The Big 5 have countered with proposed solutions including single point of contact for distressed homeowners, timelines for loan modifications, online system for status checks of applications and third party review of rejections.
Some sellers are in no hurry to push for a short sale as they would then have to find another place to live and begin paying rent. Lenders can and do withhold approval of a short sale if they don't like the price.
Some House Republicans see this as a bailout for irresponsible behavior and are angered that possible payments of $20,000 to distressed homeowners “cash for keys” could be offered to homeowners they see as deadbeats.
In Southern California, short sales made up an estimated 19.8% of the market for previously owned homes last month. That was up from an estimated 18.4% in February 2010 and 12% in February 2009, according to DataQuick Information Services of San Diego.
Combined with foreclosures, short sales made up more than half of homes sold in the Southland last month. Without viable, workable solutions, the number of foreclosures we’ve seen so far will pale in comparison to what is to come.
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