Housing News

Short Selling Has Its Consequences

Government program encourages sellers to participate

Just when the government has planned out its next move to curb the depressing rate of foreclosure in the country, its critics seem to be waiting more for the city to succumb to pressure. Last year, the Obama administration unveiled its plan of rewarding homeowners who resort to short selling. Sounds like this could have been done two years ago, right? Since short selling would force the lender to accept a payment less than the balance of the mortgage, the government would be paying a bank $1,000 each for the first and second loans. And they haven’t forgotten the homeowner too who are getting “relocation assistance” worth $1,500. All these will be implemented on April 15.

Now this is good news for all those currently underwater in their mortgages. The government has already sweetened the pot for those contemplating on short sales. The New York Times cites the benefits of this plan in three ways, “For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance. For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.”

These benefits can encapsulate the government’s purpose behind their concern. But there’s no point in getting giddy yet. Some banks are not automatically relenting to such idea unlike what most people believe to be. Because banks only collect payments for the investor, they are often required to meet the latter’s terms. J.K. Huey, a vice president of Wells Fargo, says, “This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.”

And this is not the only deterrent to let the program rolling. Short selling has its disadvantages too. First, the seller’s credit record will ultimately be affected. It wouldn’t be that easy to take a mortgage the second time around. Second, there’ll still be banks that won’t accept the short sale prices and they’ll be persistent with this decision. Home values estimated in this program are set at a minimum so expect some commotion from lenders. Finally, sellers should be aware that “deficiency judgments” may hunt them when they get back on their financial standing again. That means they’ll be paying the difference between their mortgage and the short sale price eventually. This could definitely discourage majority of them to participate.

Just like the previous mortgage modification programs, this one’s a double-edged sword too.

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