Not long ago, the following was written:
“you should be strongly advocating foreclosures – not mitigation or refinance – in your marketplace.”
They stated that foreclosures would restore confidence in the market. I beg to differ. With rare exception, foreclosures hurt everyone and should be avoided at all costs. They harm the borrower, the lender, and even innocent bystanders (unless, of course, you like a vacant, derelict home on your block).
The mitigation he refers to-more commonly known as short sales-are, to my way of thinking, the best way to restore market stability with the least amount of harm to all. My rationale is hard to argue with, by the way, since it is commonly referred to as “math.”
To be sure, a short sale is just that-a short, and in some cases very low- payoff of the home loan. If the bank did not forgive the shortfall, it could yield a deficit of tens of thousands of dollars in many cases. However, it really is the lesser of two evils from the lender’s point of view. The potential loss to the lender would be far worse if they had foreclose, because time is money. Whatever the loss is in a short sale, it would be compounded enormously in a foreclosure scenario.
Here in New York, it typically takes a lender a year to foreclose. The house is then auctioned but most of the time it becomes a non-performing asset on the REO market for at least another 6 months to a year before the lender can recover anything. In the meantime, they have to pay the taxes, manage the property, and the final cost on the REO market is always less than if the home were occupied by the original owner. So you have a double whammy: the house sells for less, and the mathematical loss is larger. But there is also a third hit the lender incurs, and that is the legal costs associated with the repossession.
Therefore, if the loss on a short sale is $50,000, with another 6-12 months of arrearage, 6-12 months of back taxes (which in New York can be astronomical), legal fees, upkeep, winterization, and a final price which is easily 10% lower, and the bank can be in the red another $100,000. Yet many loss mitigators cannot comprehend that.
The borrower isn’t unscathed, but they avoid foreclosure, and that goes a long way in helping them get re-established. They do lose the house, but on more civilized terms. By avoiding the repo man, they are able to get back on their feet sooner, which will aid us all long term. Moreover, they retain their dignity. I know people who have lost their homes and will never buy a home again, not because they cannot, but because they lost their dream. That is a tragedy.
There is also the collateral damage of foreclosures to consider. Let’s suppose you keep your nose clean, borrow less on your home than most, and you have a neighbor who is frantically trying to sell their house at a loss. If they sell the home in a successful short sale, you have seamless transition to a new owner occupant neighbor. If the bank doesn’t cooperate and it goes to REO, you have a derelict house next door. How does that reward your hard work and prudence? Really enhances the neighborhood, huh? And for a good long time, too! How does that restore confidence?
The fastest, least costly means of restoring market stability is to wring the bad loans out via short sales, period. It is better for the accounting department, better for the borrowers, better for the neighbors, and far faster and cheaper than more foreclosures. We should all be pressuring the governing authorities to lean on the banks to do more short sales and to streamline the process.