Thursday, September 10, 2009

American Banker: Treasury Short Sale guidance coming soon

From American Banker:
The Treasury Department plans to announce financial incentives for servicers to pursue short sales and deeds in lieu of foreclosure for troubled homeowners who do not qualify for the Obama administration's loan-modification program.
Under the Treasury plan, which is expected to be announced this month, servicers would get a $1,000 "success fee" when a short sale is completed, according to short sale experts who have been briefed on the policy.

The home seller would receive up to $1,500 to assist with relocation expenses, similar to the "cash for keys" programs that various servicers offer.

The article also talks about codifying just how much junior liens should take. If short sales ever become structured, where the banks basically take fair market now and all the liens divvy up the proceeds in some agreed upon way it would go a long way in liquefying the market. There are many short sales sitting waiting for an answer from the bank (see the weekly inventory reports), if that answer get reduced to a couple week time period the market will take off. It also means the foreclosure peak will have definitely passed as the distressed inventory will be moved early in the process for all but the most unwilling.


Anonymous said...

Isn't the real question how $1000 compares to the fees that the servicers make if the property goes into default and is eventually sold at a trustee sale to a third party or taken back by the bank and later resold as REO?

My understanding is that services make tens of thousands in fees through that process. Plus why would the 1st lienholder agree to take significantly less except in cases where their secured loan amount is already far, far underwater?

Effective Demand said...


I'm certainly no expert but I think the majority of fees are gained at the beginning of the non-payment process. The servicer would attain those fees on the completion of a short sale anyways plus the $1,000. So the real difference would be the difference between accrued fees from completion of short sale to REO minus the cost of funds of the money on which the servicer forwarded payment to the beneficiary.

As to why the 1st lien would take less.. 2 reasons. First if its a falling market, less now is better than less later and secondly the massive political pressure they are under to avoid foreclosures and additional cost to manage the foreclosure process means they would get less.

Anonymous said...


Thanks. Maybe you're right, but I tend to think that $1k must be pocket change when trying to influence servicers, who ultimately have to influence the actual lienholders. If the economics were compelling, one would expect rational lienholders to already be dumping the houses via shortsales. The fact that they're not makes me really question was true effect $1k can have.

BTW, I'd love to see inventory hit the market via short sales so we get some true price discovery and find a clearing price sooner, rather than becoming Japan in the 90s.

Effective Demand said...


The $1,000 is just a part of the whole economics trying to make short sales more appealing than foreclosure. The servicers get even more (as does the borrower) for successful loan mods. Showing the priorities of the administration. Also for the portfolioed loans I think this will make a much bigger difference than the securitized loans which have a lot more variables involved and are more defined by inflexible pooling service agrements.

Right now the junior liens are what are holding up short sales, especially with the way foreclosures work in CA. With an insolvent borrwer the junior liens basically have "hostage value" by holding things up unless the first lien gives them what they want. If they can ever figure out a systemic way of granting quick short sales the market would really take off.

But, as always, the technical challenges are great (especially ensuring that the seller isn't trying to sell it back to himself, a friend, or a family member so they can stay in the home at a reduced rate) as are the permutations for each scenario. Still it seems like there needs to be a way to get market value NOW for a property and then fight out who exactly get what later. Maybe give the first lien 80% of the money right away and have some sort of arbitration so the rest can fight over the scraps.

I totally agree about price discovery but that is exactly what the Fed & Treasury are delaying. They want the market the way it is right now, in stagnation. The open question is how long that will remain so.

ronald said...

"If they can ever figure out a systemic way of granting quick short sales the market would really take off."

I noticed the other day the Bank of America was offering 5% 30 year and 4% 5/1 IO 5 year.
Excellent indication of low demand for retail mortgage a reminder that the hot season is over and the stimulus has pulled forward demand from the buyer pool. High Unemployment and wage deflation are taking its toll.

Effective Demand said...


The low interest rates are more a function of the massive purchases done by the fed to lower long term rates. $1.25 trillion in mortgage securities are being purchased, $200 billion in agency debt and $300 billion in treasury debt... all using printed money.

I have noticed the BofA IO ARM before, I am really interested in how they underwrite that thing. According to regulators guidance they would have to qualify the borrower at the highest index rate and fully amortizing payment.. but I am wondering if they really do so.

ronald said...

Yes, but lets take it a step further.
The FED is attempting to drive market action so as demand slows we can expect lower rates the issue is whether the market will respond.

Effective Demand said...

I think we will get lower rates over the short term, up to the end of the year. For the simple reason the Fed is hurrying up and finishing their QE purchases.

The question becomes what happens after the end of this round of purchases. All I see are more QE purchases on the horizon. If I was a bank the last thing I would want is a mortgage on the books, you get no risk premium for them and you get treated like dirt if the borrower stops paying.

Anonymous said...

The question is whether or not a deficiency is held against the borrower after a successful short sale. Unless this is addressed, the problem still exists.

short sale agent Carlsbad said...

There are certainly a lot of details like that to take into consideration. That’s a great point to bring up. I was a bank the last thing I would want is a mortgage on the books.