Banks are encouraging underwater homeowners to short sale their properties, that is, sell their home at a loss rather than go through foreclosure.
In 2009, the Obama Administration designed a $75 billion “Making Home Affordable program, initially created to help distressed borrowers’ receive loans so they could stay in their homes.
Unfortunately, the plan also offers incentives for banks if they do not offer modifications for borrowers and allow homeowners instead to sell their home at a loss.
Lenders are increasingly using this program to receive government incentive payments by offering homeowners the opportunity to short sale their homes. Under the plan, the government also shares the cost of extinguishing second liens in the form of second mortgages.
“Banks push homeowners into short sales, and the houses go to investors,” said Pam Hall, chairwoman of the Home Defender’s League.
“In Oakland, investor-owned properties are transforming our neighborhoods, especially in communities of color, as homeowners lose their homes, and Section 8 tenants are pushed out as tenants.
“Mayor Quan is dedicated to stabilizing the Oakland housing market, but rampant short sales are undermining any attempt Mayor Quan, grass-root organizations and housing organizations are using to try and keep people in their homes.”
Over 25 percent of California borrowers were underwater between 2007 and 2010, and average Americans lost 40 percent of their wealth during the recent Great Recession
With banks quick to foreclose and slow to offer loan modifications, the loss of wealth in the middle class is likely to increase.
“The Multiple Listing Service show homes in foreclosure, and real estate agents are flooding homeowner with ‘deals’ to bail out of their homes,” said Hall. “The results are, investors are able to come in, revamp a home and boost the price or get permits to tear down and build other entities that aren’t a fit for the neighborhood.”
According to Bill Fricke, senior credit officer for Moody’s Investors Service in Manhattan, banks like these short sales. “Banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, and in some cases providing large cash incentives.”
Looking for ways to keep people in their homes, community organizers point to the multi-state agreement between the nation’s attorneys general and the banks and how the banks continue to benefit to the detriment of homeowners.
As part of the nationwide $2-billion agreement with Bank of America, Ally Financial, Citi Mortgage, JPMorgan Chase and Wells Fargo, forgiving short sale debt is one way lenders can meet their financial obligations.
Nationwide, about 60 percent of the debt forgiven through Sept. 30 has been through short sale deficiency waivers.
“If banks were committed to stabilizing the housing market, they would keep homeowners in their homes by offering across the board principal reductions rather than short sales. Unfortunately the bank makes more money with short sales. The results are that homeowners get sold out,” said Hall.
About 14 million homeowners are in foreclosure, behind on their mortgages or owe more than their properties are worth, said RealtyTrac Inc., a property-data company in Irvine. California.