San Diego County’s level of housing distress took a pivotal turn this year.
Short sales, once rare deals in the real estate world, now make up a bigger
share of the residential market compared
to
foreclosed homes that have been resold.
Short sales allow homeowners who can’t afford their mortgages to sell their
homes for less than what they still owe, as long as the lender says OK. One in
five homes resold in the county were short sales, based on August numbers from
local real estate tracker DataQuick. Compare that to single-digit percentages
seen while the housing bubble began to percolate in 2007.
Short sales are expected to become even more common and easier to close as
Freddie Mac, which owns or guarantees a sizable chunk of mortgages in
California, will make it easier for borrowers to complete them starting next
month. Borrowers will see that the process is considerably shorter and that it
will leave less of a financial black mark on their credit histories.
Already boosting the number of short sales is a $25 billion mortgage deal
between the nation’s biggest banks and 49 states that settled foreclosure abuse
allegations and was signed earlier this year. The agreement essentially forces
banks to do more short sales and provide relief to borrowers on expedited terms.
Some banks are even offering cash as incentives to get more people to short
sell.
“Banks are really motivated to do short sales,” said Matt Battiata, who owns
Del Mar-based Battiata Real Estate. “...Banks have decided and learned over the
last several years that short sales are a much better way to mitigate loss.”
The end result appears to be good for the housing market.
The increase in short sales means a more dynamic real estate market, fewer
losses for banks and increased chances that short sellers could buy homes again
after a shorter hiatus.
Why the latest Freddie Mac changes matter
The biggest change? Freddie Mac officials in late August said they will no
longer require homeowners to default on their mortgage in order to qualify for a
short sale. As of Nov. 1, homeowners with Freddie-backed loans would just have
to prove financial hardship from events including death, divorce or
disability.
The change is a great protection for consumers because Freddie Mac doesn’t
typically postpone foreclosures for defaulted borrowers trying to qualify for a
short sale, said
San
Diego short sale negotiator Jacalyn Blank. If the short sale falls
through, then the homeowner with a Freddie-owned loan is likely to face
foreclosure.
Without the upcoming change, “it’s a much more dangerous game to play,” Blank
added. “...Now they won’t have to take that risk anymore.”
The change also helps borrowers preserve their credit score, which can take a
dive if they are behind on their mortgage payments and hurt their chances of
buying another home.
The latest Freddie Mac changes also involve giving its servicers (the
companies that handle mortgage payments) more authority during the short sale
process.
This is another biggie, Blank said, because “it’s a long chain of telephone”
among Freddie, the servicer and negotiators without this newly granted
authority.
“This should cut two to three weeks out of the (short-sale) process,” she
said.
Freddie Mac buys mortgages from lenders and sells them to investors on the
secondary mortgage market. The government-controlled company with fellow
mortgage giant Fannie Mae owns or guarantees more than 50 percent of the
mortgages in California, so what Freddie says and does in a short sale could
affect a number of potential buyers and sellers in the market.
Why the mortgage settlement matters
Six months ago, five of the nation’s largest lenders struck a $25 billion
deal with attorneys general of 49 states to settle allegations that they
financially hurt borrowers and abused the mortgage system for years. Though
pundits would later
criticize
California Attorney General Kamala Harris and other leaders for
giving in to the banks too easily, the long-awaited settlement was major. It’s
second only to the massive tobacco-industry deal reached in the 1990s.
Politics aside, the point of the historic agreement was to force those
lenders — Bank of America, Wells Fargo, Citi, Chase and Ally — to provide relief
to consumers in the form of loan modifications, mortgage forgiveness,
refinances, and yes, short sales. So far consumer relief has totaled more than
$10 billion, with 80 percent of that being short sales.
More than 74,000 borrowers nationwide have completed short sales through the
settlement, based on a recent report from the agency watching over the deal.
Roughly 34 percent were done in California. (County-by-county tallies were not
available.)
The logic behind short sales is to get struggling homeowners out of homes
they can no longer or barely afford and shift those properties to consumers who
are in a better financial position.
“We tried, we really did,” said Mary Anne Camilon, who moved in with family
in Ventura County after losing her teaching job in San Diego. “When we realized
we weren’t moving back to the San Diego area, there was no reason to hold on to
it (the house) anymore.”
The national
mortgage settlement is structured in a way that banks get more
incentives if they provide more consumer relief, such as short sales, during the
first year instead of dragging it out through the three years they have been
allotted.
Possible penalties are also pushing banks to move faster. Every time one of
the lenders provides consumer relief, they get a credit toward their settlement
record. If they fail to fulfill what they promised in the deal within three
years, then they could pay at least 125 percent “of its unmet commitment
amount,” the mortgage report stated.
“I believe we have made a good first step,” wrote the appointed mortgage
settlement watchdog Joseph A. Smith in the progress study dated Aug. 29. “More
hard work remains.”
Why cash bonuses will help
Major banks like Bank of America and Chase are pushing more short sales
through with the help of cash.
They’re offering distressed borrowers deals that for some are hard to
believe.
“I think it said, ‘You could be eligible for up to $20,000 in funds to help
you get into a new home...” said Camilon, the teacher who short sold her Vista
property.
She was skeptical, but after consulting with Ryan Donigan, of Utopia Mortgage
& Real Estate, she went ahead with a short sale. Once escrow closed, she got
her money.
The trend of banks offering cash bonuses for completed short sales emerged
about a year,
as
the U-T San Diego reported. But it has grown more common. This
year, Bank of America began to offer it to any of its borrowers who ask. Certain
banks are pickier.
Bank of America is offering delinquent homeowners $2,500 and $30,000 in
relocation help once a pre-approved short sale closes. Similar offers, many of
which appear expedited, have been seen from Citi, Chase and others.
“I have a Carlsbad seller who got a letter from Chase saying they will pay
them $35,000 to do a short sale,” said Battiata. “There’s outreach...On a
foreclosure, they lose more money.”
What this means for the market
Transit planner Brian Lane and his wife bought their Lakeside home at the
height of the market. As the recession set in, the couple with two kids could
barely afford the mortgage so they short sold their home in March 2010.
Despite that experience, the Lanes want to own again and it could be as soon
as the upcoming spring.
“I am just starting to look,” Lane said. “We had a short sale in March 2010,
so will be waiting to March 2013 to close an FHA loan.”
As the banks continue to fulfill their promises to hurt borrowers through the
$25 billion foreclosure settlement and the Freddie Mac changes take effect, more
former homeowners like Lane could theoretically own again within a short time
period. Their credit scores won’t sink as low because they aren’t forced to
default and because a short sale gives off less of a sting on your credit report
than a foreclosure.
“My story is going to become quite common as those who short sold are looking
to re-enter the market,” added Lane, whose score took a 150-point dive after his
short sale. Now? It’s rebounded to more than 700.
“I’m optimistic,” he said. “I hear home prices are going up a little ... so
hopefully the people who have been waiting to put their house on the market will
put it out because it’s more of a seller’s market.”
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