The Short Sale Is Selling Everyone Short

The U.S. has an excess supply of housing. What’s more, it shows no sign of decreasing. And in this case, the culprit isn’t just overextended homeowners, but the banks, too.

Case in point: I’ve spent the past two weeks shopping for a house that I can use for investment purposes. What I’ve found is that while there are many bargains available, few will actually materialize.

The problem is that true sellers – those unencumbered by losses and not just intent to ditch the property at almost any cost – cannot sell their homes because they face competition that they simply can’t beat.

That competition is coming from distressed sellers – those who are advertising “short sales.”

A short sale is a way of getting out of a mortgage without enduring the pain of going into foreclosure. So the seller basically agrees to sell the property at a lower price than the mortgage – i.e. at a loss. But the sale can’t proceed without consent from the lender. It’s then a matter of negotiating with the lender to figure out how much responsibility the seller has for the loss.

The trouble is, short-sellers are making an already bad situation even worse for the rest of us because they’re under the impression that they can simply walk away from a property as long as they’ve found a buyer. So they list their properties at often ridiculously low asking prices, thus depressing the market around them.

But, wait… that’s good for buyers, isn’t it? Not so fast…

The Short-Sale Saga

Once a short-seller set a price and gets offers, he takes them to the bank, which then decides if it wants to eat the difference between the loan amount and the amount offered by the buyer.

In most cases, the banks come back with a different, higher amount – and then the circus begins.

The seller naturally balks at the higher price because he wanted less burden – i.e., a free lunch).

The buyer balks because the price is much higher than the listing price – which was a joke to begin with.

By the time the process churns through, three to four months have passed because the bank is obviously in no hurry to take the hit on its books. Moreover, it’s in no rush because the government is subsiding its operations and providing cheap money to lend.

And who’s the fall guy from this fiasco? The real sellers.

A Three-Year, $225,000 Price Depreciation

As a result of short-sellers squashing their market, true sellers have to lower their asking prices to reflect what shows up on the Multiple Listing Service as the average price for the area.

And you guessed it… these average prices include grossly mispriced short sales. Sales that aren’t based on the true value of the market, but the whims and wishes of a seller who got in over his head.

For example, one place I looked at was listed at $300,000 just three years ago. Today’s price: $75,000.

Not only that, the carrying costs are high because it’s a condo that comes with high monthly homeowners fees and property taxes, which were based on higher assessments.

A similar property sold a few weeks earlier. It was a “short-sale,” listed at $75,000. The bank had returned with a counter-offer to the buyer of $150,000. The home eventually closed for $135,000. The seller was lucky. The buyer must really have wanted the place. But it still took three months for the process to close.

And don’t expect any help from the realtors listing the property either. Sure, they’re doing it in hopes of making sale, but they won’t spend much time on it – and sometimes won’t even respond to a short sale.

Why? Because the prices are low… they’re artificial prices that don’t reflect the home’s real value… and the short sale can take months to consummate. Not only that, it will often result in a lower commission because the bank will ask all parties for concessions.

And if the short-seller has moved out and is renting the place, tenants rights can interfere with the sale, with many paying below-market prices and not compelled to keep the place in showable condition, or be available for a showing.

Here’s the deal…

The Bargains Are Out There… But You’ve Got To Work For Them

A low selling price means absolutely nothing in this market if the home is in pre-foreclosure.

The better deals are available on “bank-approved prices,” which means the properties are already in foreclosure and the bank has already agreed on a price.

And of course, the best possible price will come from a non-short-seller who is forced to compete with short-sale prices – i.e. artificial competition.

And remember, while there are bargains available, there’s no such thing as a free lunch. Getting what you want requires more work than the media lets on.

And as for U.S. housing prices… they’re going to stay low until the real selling prices are determined. And that’s not happening yet.

Karim Rahemtulla

Source: The 800 Pound Gorilla on the Housing Market’s Back

Fannie and Freddie, the nation’s two-largest mortgage holders, will target loans in which borrowers are 90 days or more delinquent, and have high loan-to-income ratios, Bloomberg News reported. The companies may offer homeowners reduced interest rates and longer terms of as much as 40 years to trim monthly payments. By rewriting the terms on some overdue loans, homeowners won’t have to pay more than 38% of their monthly income on housing payments, officials from the U.S. Treasury Department and the Federal Housing Finance Agency said at a news conference in the nation’s capital yesterday.

It’s the government’s most aggressive move yet in its battle to reverse the rising tide of mortgage defaults and home foreclosures, MarketWatch.com reported.

“Foreclosures hurt families, their neighbors, whole communities and the overall housing market,” said James B. Lockhart III, director of the Federal Housing Finance Agency. “We need to stop this downward spiral.”

The plan centers upon Fannie and Freddie because they are than operating under a government conservatorship, and because the two entities own or back roughly $5 trillion in loans, CNNMoney.com reported. The federal government took over the two government-sponsored enterprises back in September – not because of worries about the fading U.S. housing market, but because of concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds, a Money Morning investigative report showed. Fannie Mae on Monday reported a third-quarter loss of $29 billion.

The initiative expands efforts by the Hope Now Alliance, a group that U.S Treasury Secretary Henry M. “Hank” Paulson Jr. helped create last year. Hope Now is made up of investors, advocacy groups, and mortgage lenders and servicers such as Citigroup Inc. (C) and Wells Fargo & Co. (WFC). The past success rate for “curing” delinquent loans with modifications similar to what was proposed yesterday was about 50% for both prime and subprime mortgages.

“With such broad adoption, this new protocol will be a standard for the industry to quickly move homeowners into long-term sustainable mortgages,” Neel Kashkari, the U.S. Treasury’s interim assistant secretary, and the architect of much of the housing legislation aimed at easing the U.S. real estate crisis, said in a prepared statement.

MBA Chief Economist Jay Brinkman conceded that “we realize that a number of those can’t be saved because of the borrower’s situation. But if we can save half of them, that’s a good result.”

While a number of major banks – including Citigroup, JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) – have announced loan-modification programs in recent weeks, those financial institutions hold only a fraction of the nation’s mortgages compared with Fannie and Freddie.

Federal agencies have been slow to present their own plans to modify the loans of millions of “at-risk” homeowners – despite calls from congressional representatives and harsh criticism from housing advocacy groups. Those critics want the government to take a more direct role in preventing foreclosures.

Under the new program, mortgages on owner-occupied homes that are at least 90-days past due with a loan-to-value of 90% or more will be eligible for the streamlined modification, MarketWatch reported. Homeowners who are “underwater” – owe more on their home than it is worth – will be eligible. However, homeowners who purposefully default on their mortgage to get a modification will not be eligible. Borrowers who want to know if they qualify should contact the company they make their payment to each month – called the “servicer.”

To encourage them to take part in this program, these servicers will be paid a fee of $800 to modify loans.

Even with this program, the borrower ultimately still will be responsible for paying the full amount of the principal borrowed. The program is only designed to defer payment on part of that principal to make the monthly payment affordable, experts say.

Lockhart said the program would apply to loans guaranteed by Fannie or Freddie, including prime, Alt-A and subprime mortgages. Other kinds of loans may also be covered. Lockhart urged the private-label mortgage industry to adopt the modification plan as well, MarketWatch reported.
The program will start by Dec. 15.

Moody’s Economy.com (MCO) forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale, and another 1.9 million are projected to lose their homes in 2009, CNNMoney.com said.

Source: Government Rolls Out Long-Sought-After Anti-Foreclosure Program