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A couple other outlets have picked up on my research of the first report from the Office of Mortgage Settlement Oversight, showing that banks have, to this point, paid off practically all of their “punishment” through short sales that they were already pursuing. Yves Smith provides additional context to this point, looking back at the short sale market and finding that it had already outpaced foreclosures late last year:
Short sales began outpacing foreclosures in some states late last year. Six states saw more preforeclosure sales – typically, short sales – than foreclosures in the fourth quarter, according to RealtyTrac, an online marketplace for foreclosure properties based in Irvine, Calif. In preliminary first quarter data for 2012, that total jumped to 12 states, including traditionally big foreclosure states like California and Arizona, RealtyTrac reported Thursday.
(California and Arizona, where have I heard them before… foreshadowing for later in this article!)
Similarly, you can go back to summer 2011 and find banks figuring out that short sales made more financial sense for them. They started offering financial perks to homeowners to take the short sales. By the way, these cash payouts, known as “transitional assistance,” can be written off as “credit” for their punishment in the foreclosure fraud settlement.
It makes lots of sense for banks to pursue short sales. Most important, they don’t have to go through the foreclosure process, which has proven too great a hurdle in many states, because of the new legal rules and the faulty paperwork the banks have tried to peddle. A short sale avoids all of that mess. What’s more, they get to write new paper on the home, free from the chain of title problems (not really, but for the purposes of this transaction, the paper looks correct). They don’t have to take custody of the home and maintain it while they find a buyer in a post-foreclosure sale. And a purchase in a short sale is likely to have a higher price than a purchase of an REO property after a foreclosure.
Banks figured this out a year ago. Yet for some reason, they are allowed in a settlement meant to benefit the homeowner, to use short sales, which they have already pursued for quite a while. Does a short sale benefit a homeowner? In some ways, relative to a foreclosure, yes. They don’t get the same credit hit. They get a “forgiveness” of the balance between the sale price and what’s owed on the mortgage. If they are relocating for work, they don’t get locked into an unsalable home. But the end result is that the homeowner loses their home. Put everything else aside. The foreclosure fraud settlement was ostensibly designed to have banks benefit homeowners and keep them in their homes. It was not meant to accelerate the removal of homeowners from their homes.
And there’s the issue that economically a short sale amounts to waiving a deficiency judgment, which are barred in non-recourse states anyway, including… California and Arizona, where we’ve seen high pickup on short sales for a year now.
Incidentally, short sales are capped in the settlement. This “relief” being described won’t even all count toward the settlement. But that didn’t stop the oversight monitor from including all the short sales in his analysis. Because it looks good to have a really big initial number.
The bottom line is this: the settlement was sold on the basis of principal reduction. So far, in a settlement that’s over six months old, 7,093 people have seen a principal reduction on a first lien modification. That’s it.
Sadly, none of this is stopping the press from running with the headline number of $10.6 billion in consumer relief, without explaining until much further down in the story that it’s practically all short sales. Here’s Shaun Donovan going along with the lie:
“The banks are heading in the right direction,” said Donovan. “This will deliver real relief to consumers.”
There are about $3 billion in principal reductions in the trial stages. Trial modifications through HAMP only made it to the permanent stage at about a 50% clip or less. Don’t count on all of them going through.
More from Ben Hallman.
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So after orchestration of f*ckery and fines impose for said f*ckery, the way to pay fines and bailouts for f*ckery, is more f*ckery? Sounds like the Mafia?
The praise next week in Charlotte for this monstrosity will be something to behold.
The Mafia at least has a set of rules that they follow. They also have more integrity.
Don Corleone 2012!
They get a “forgiveness” of the balance between the sale price and what’s owed on the mortgage.
And with that forgiveness they get large cancellation of indebtedness income reported to the IRS.
@ david dayen – isn’t this foolproof for the banks, regardless of the possibility of deficiency recovery?
I am thinking of stop loss insurance, PMI or Fan Fred or whatever.
Doesn’t the bank get to present that ‘bill’ to the borrower’s insurer?
Wasn’t this a win for banks no matter what?
Love your work, keep it going.
I disagree with your premise a bit. First of all, the settlement was not “ostensibly designed to have banks benefit homeowners and keep them in their homes,” it was designed to incentivize the banks to move through the distressed inventory more quickly. In fact, this has been what ALL of Obama’s housing policy has been geared toward. Keeping them in their homes was one possible outcome but, since they were already on the fast track to losing their homes, it was more about providing a better solution for everyone involved.
Also, it’s a falicy to look at the settlement as “punishment.” One of the biggest surprises about the settlement was how little of it was actually punitive. This is because the Attorneys General (an the administration) decided to use this as a leverage point to try and force the banks into action.
Given that short sales provide a better option for the banks, a better option (than foreclosure) for the homeowner, and a good option to get through distressed inventory as a whole, why is this a bad thing on balance?
That being said, I do agree with you that the settlement was sold publicly on loan modifications and principle forgiveness. The incentives just weren’t in place to push toward those solutions.
Also, the modifications only got through at a 50% clip because, for most homeowners in danger of losing their home to foreclosure, loan modification only offers a temporary solution to their financial problems. If the homeowner is so distressed that they can’t make their payments it is rare that this is their only financial issue. So, they redefault and don’t make it out of the trial period. Sad, but true.
Are not the media and banks in lockstep on issues relating to casting Banks in the best light possible. Can you watch a MSM news program for more than ten minutes without seeing a banking ad? MSM is a propaganda arm of Multi-National Corporate interests that serve the .01% and their minions period. Should be surprised when media doesn’t “fall” for their bullshit.