(TheNicheReport.com) -- The term "short sale" used to be unmentionable in the loss mitigation and real estate-owned (REO) departments at major banks, but recent housing and financial reports indicate that bankers may be changing their mind when it comes to selling homes at a loss.
According to a report compiled and issued by Lender Processing Services, 23.9 percent of all homes purchased during January were short sales, while foreclosure sales accounted for 19.7 percent of real estate acquisitions.
Should this trend continue, the so-called "shadow inventory" -the significant number of distressed properties that have not yet been repossessed by the banks- will hopefully be reduced. The shadow inventory is a very worrisome factor that many real estate analysts think of as a major obstacle to the recovery of the American economy.
Why Short Sales Make More Sense than Foreclosures
A short sale is considered a strike against the lender whether a property is still owner-occupied or already on the REO portfolio of a financial institution. Short sales, in theory, only benefit the buyer -provided that the median prices of homes in the regional market of the short do not take a sudden drop. In some cases, selling a foreclosed home makes better financial sense to a bank since the property has already been recorded as a loss in the balance sheet.
Short sales are preferred by troubled borrowers who would rather lose title to their homes than go through the foreclosure process and suffer the negative strikes on their credit history, although this is not always the case. In today's restrictive mortgage lending environment, a delinquency on a borrower's record is damaging enough. If a lender files a lis pendens notice in court, that action can prove negative for someone who wishes to purchase a home in the future, regardless of the short sale.
The report from Lender Processing Services indicates that short sales are actually bringing more money to the banks than REO portfolio transactions where the properties have already been foreclosed upon. There are a few reasons for this trend: foreclosures are costly affairs, mostly for the lenders. Once a property goes into a bank's REO portfolio, it must either be maintained or sold through a real estate agent, and it could take some time before it goes to the closing table.
In most short sales, the homeowners have an active interest in getting to the closing table quickly, and they can negotiate with the bank so that proper documentation relieving borrowers of liability and responsibility is produced. Such documentation can later be used by borrowers to clean up their credit records.
A Reversal of Attitudes
Now that banks are warming up to the idea of short sales as viable options, they may even take the initiative to offer higher cash incentives to borrowers who have decided to fight foreclosures in court. Bank of America, JP Morgan Chase and Wells Fargo are some of the major banks that have reversed their attitudes and now are offering considerable incentives for some borrowers to walk away from their properties and allow a short sale to take place.
These new developments are auspicious for the American economy, since they will reduce the number of foreclosures and signal the return of optimism to the housing market.