The biggest US banks, including Bank of America, Wells Fargo, Citigroup, and JP Morgan Chase, are preparing to rid themselves of troubled mortgages by engaging in an aggressive program of "short sales," in which homeowners settle debts by selling their properties for less than the mortgage value.
With home values continuing to drop across the US, leaving many mortgage holders underwater, short sales are expected to increase sharply this year.
The number of homes entering, or in, foreclosure is also expected to climb to a record 4.3 million, from 3.4 million in 2009.
By June, more than five million homes (or 10% of all homes with mortgages) are expected to drop below 75% of their mortgage balance,
That's the threshold at which the owner starts to seriously consider just walking away, even if he or she has the money to keep paying, according to a recent NY Times report.
“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”
Compared to foreclosures, banks can cut their losses by 20% with short sales.
BofA executive Matt Vernon says short sales are growing faster than REOs [real estate owned transactions], a positive development for banks.
Mark Zandi, chief economist of Moody’s Economy.com, forecasts short sales and deed-in-lieu transactions will total 20% of all distressed home sales this year, up from 15% last year.
In April, the Obama administration will launch a program that encourages homeowners, lenders and investors to complete short sales by providing up to $3,500 in incentives.
Such an effort will only increase and hasten the number of short sales this year. That will be good not only for banks, but also for prospective buyers.
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