“NEW YORK — Drew Schlosser tried for two years to sell his three-bedroom waterfront condominium in Punta Gorda, Fla., for less than he owed on its two mortgages. The deal went through last month when Wells Fargo & Co. agreed to take a $165,000 loss on the loans.
Even after he had an offer of $155,000 for the property, it took five months for the lender to approve the purchase, a so-called short sale, in which the bank accepts less than the balance owed on a property. Schlosser said earlier offers had fallen through as bidders lost faith the bank would take less than the $320,000 in two mortgages.
“It was just kind of a mess,” said Schlosser, 31, a market research company director. “You really have to get buyers who are patient.”
Three years into a U.S. housing slump that pushed the economy into a recession and cut resale values by 30 percent from their peak in 2006, banks are beginning to go along with short sales in increasing numbers.
Short sales tripled to 40,000 in the first six months of this year compared with the first half of 2008. Yet for each short sale, there were 25 foreclosures started or completed in the first half of this year, according to data from the Office of Thrift Supervision and the Office of the Comptroller of the Currency.
“It’s really finally dawning on banks that they’re better off with a short sale,” said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California. “I think banks were in denial.”
Wells Fargo, Bank of America Corp. and JPMorgan Chase & Co. this year have hired and trained more staff, developed software systems for expediting short sales, and increased marketing of short sales to delinquent borrowers.
Banks are increasing such sales under pressure from the Obama administration and lawmakers who criticized them for favoring foreclosures and delaying short sales, Green said. Lenders and loan servicers also stand to receive up to $2,000 in incentives to close short sales under a Treasury Department plan unveiled Nov. 30.
The increase in banks agreeing to take losses on mortgages is helping some homebuyers and real estate brokers.
Lenders have been reluctant to do such sales because they didn’t have procedures for employees to approve a financial loss for the company, said Alan White, assistant professor at Valparaiso University School of Law.
“A short sale requires somebody to stick their neck out and make a decision,” said White. “There are not good structures in place to incentivize losses.”
Bankers also have been slow to sign off on short sales because homeowner associations, mortgage insurers and second-lien holders might not agree to the deal, said Michael Frantantoni, vice president of single-family research at the Mortgage Bankers Association.
Delinquency pressures
The first choice for lenders has been to try to keep borrowers in their homes, offering loan modifications as an alternative to foreclosure, Frantantoni said. More than half of the homeowners who were granted modifications of delinquent mortgages defaulted again within a year, according to a Sept. 30 report by the Office of the Comptroller of the Currency.
“The single biggest problem was the lack of a vehicle or mechanism at most banks to handle short sales,” said Walter Molony, a National Association of Realtors spokesman. “You could say they were shortsighted in dealing with the problem.”
Pressure is building to approve short sales as the number of delinquent mortgages has grown to 3.2 million and an estimated 7 million foreclosures loom in the next two to three years, according to RealtyTrac Inc.
New Treasury Department guidelines for foreclosure alternatives scheduled to take effect in April will require lenders to consider borrowers for a short sale on their primary residence 30 days after missing two consecutive payments on a modified loan or after the borrower requests a short sale.
The Treasury Department would pay up to $1,500 for a homeowner to relocate, $1,000 to loan servicing companies that accept a sale and a maximum of $1,000 to help settle a second mortgage or subordinate lien. A lender must agree to release the borrower from all liability for repayment for the mortgage under the plan.
Outreach, not handouts
In July, Wells Fargo began mailing notices to delinquent borrowers advising them that short sales might be an option to avoid foreclosure.
“When we determine that a loan is not affordable for the customer — either because a modification was denied or failed — we obtain the value of the property, run it through our loan decision tool and then send a letter to the customer advising them of our short sale program, including the short sale price we are willing to take on the property,” Debora Blume, a spokeswoman for Wells Fargo Home Mortgage, said in an e-mail.
JPMorgan doubled the number of staff members trained to handle short sales after adding 5,000 people since Jan. 1 to deal with distressed mortgages, said Thomas Kelly, a spokesman for the bank’s home lending division.
“We’re reaching out to people who are struggling with the Obama loan modifications (program) or our own,” Kelly said. “Approaching customers is a very recent phenomenon.”
For sellers like Drew Schlosser, who bought 10 properties in Florida as investments during the housing bubble, getting a short sale was a relief even if the process was difficult.
Schlosser said he had to send Wells Fargo a hardship letter, demonstrating that his financial situation merited a short sale. He also had to provide pay stubs, bank account information and past tax returns. To avoid fraud, the bank also required evidence that the transaction was an arms-length sale and not to one of his relatives, he said. ”
“They don’t agree to do it because you’re upside down,” Schlosser said. “If they think you can pay for it, they’re not going to let you out of it.”
By John Gittelsohn and Margaret Collins
