Banks are increasingly willing to approve short sales before borrowers go into foreclosure, a bright spot for struggling homeowners hoping to escape an underwater mortgage with the least damage to their finances.
About 27 percent of home sales in Palm Beach, Broward and Miami Dade counties last year were short sales where the lender had not filed foreclosure papers against the homeowner, according to a distressed property report released today by the Irvine, Calif.-based RealtyTrac.
It’s a turnaround from a time when borrowers had to default on their mortgages before persuading their bank to do a short sale, which is where the lender agrees to accept less for the home than what is owed on the mortgage. In South Florida, the average difference between the unpaid mortgage balance and non-foreclosure short sale price last year was $116,505, the RealtyTrac report said.
South Florida Realtor Joanne Epstein said the paradigm shift by banks is a reaction to federal rules that went into effect Nov. 1 allowing homeowners to qualify for a short sale even if they are current on payments. Banks also earn credits to satisfy their obligations under the $25 billion National Mortgage Settlement by approving short sales.
“Some people are so scared to not pay their mortgage because they don’t have bad credit and don’t want bad credit,” said Epstein, who works for the Keyes Company/Ragbir Team. “But they can’t afford to pay anymore and are just throwing out good money.”
The federal rule changes only affect loans backed by Fannie Mae and Freddie Mac.
Under the November changes, borrowers who are current on their mortgage but suffer a hardship such as a death, divorce, or a job change requiring them to move more than 50 miles from their home can be qualified for a short sale by their loan servicers without additional approval from Fannie or Freddie.
The RealtyTrac report notes that the number of South Florida short sales conducted in 2012 before a foreclosure was filed increased 30 percent from the previous year.
Statewide, 33 percent of all home sales last year were short sales completed before a foreclosure was filed. The average difference between the unpaid principal balance and non-foreclosure short sale price was $94,950.
Housing experts say short sales benefit homeowners and lenders. A homeowner suffers a lighter ding to his or her credit than if a foreclosure was completed. Lenders save the cost of a lengthy court proceeding.
An increase in short sales may also lead to a quicker housing recovery, said RealtyTrac Vice President Daren Blomquist. South Florida short sales had a higher average sale price last year _ $133,816 _ than bank-owned homes, which went for an average of $129,320.
“Allowing these homes to change hands more quickly will put them with new homeowners who have loans they can afford, which means they are more likely to maintain the property,” Blomquist said. “They’ll be more motivated to be responsible homeowners.”
Kevin Kent, a broker-associate with Platinum Properties in Palm Beach County, questions RealtyTrac’s numbers. He said the percentage of non-foreclosure short sales seems high and that many lenders remain stalwart about having homeowners go into default before considering a short sale.
“Until someone misses payments, the lenders aren’t paying a lot of attention,” Kent said.
But banks are more amenable in general to doing short sales because “they get hurt a lot less,” Kent said.
Average 2012 sale price of a short sale in foreclosure
South Florida, $133,816
Average 2012 sale price of a bank-owned home
South Florida, $129,320