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.