Banks Realize Short Sales Are Better Than Foreclosure, Pay Homeowners To Sell Now

It’s been nearly a half decade since the housing market imploded like an old stadium packed with explosives and the ground is still rumbling from the impact. Realizing it’s better to recover some money now rather than trying to get all their cash back eventually, more banks are making it easier for homeowners to unload their houses for less than what is owed on the mortgage.

So-called short sales are traditionally a nightmare to all involved parties. Homeowners have had to jump through hoops at uncooperative banks who stubbornly insisted a buyer could be found who would be willing to pay the full amount remaining on the loan. Home buyers often balked at even making offers on short sale properties, knowing it could take months of waiting just to find out the bank didn’t approve the deal.

But according to Bloomberg, banks have come to see that it might make more sense to unload the property ASAP rather than go through the lengthy foreclosure and auction process.

Thus, banks are now pre-approving some short sales which cuts down the amount of time it takes to close on the deal. Some banks are also forgoing their right to pursue unpaid debt and occasionally providing large cash incentives.

Bloomberg has the story of one underwater homeowner who received a letter from JPMorgan Chase declaring, “You could sell your home, owe nothing more on your mortgage and get $30,000.”

So she took the deal and the bank sold her home for $200,000 less than what was owed on the mortgage — and she walked away with $30K that she’ll be using to move and make a deposit on the rental she’ll move into once she closes later this week.

“I wondered, why would they offer me something, and why wouldn’t they just give me the boot?” she tells Bloomberg. “Instead, I’m getting money.”

“When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure,” explained a rep for Chase.

In the last two years, short sales have jumped from only 2% of U.S. residential transactions to 9%.

Banks Pay Homeowners to Avoid Foreclosures [Bloomberg]

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  1. Marlin says:

    Yea never understood why they fought short sales for so long.

    Short sale means its off your books and you get some money back.

    Foreclosure cost more money and the people in it can fight driving cost up even more. Let alone if the house gets gutted then all you have is a lot with trash on it.

    • ChuckECheese says:

      Well, in the olden days, a bank could auction their foreclosures for something very close to the market price. Now the bank is making these same old decisions based on the current inflated value of underwater mortgages. So the bank looks at the existing (unpaid) $400,000 mortgage on a home worth $119,000, and says “hell no we won’t refi.” In the old days a foreclosure and auction would have netted them something significant compared to the existing mortgage. Now prices are so depressed that house might sell for $60,000 at auction, or it might not sell at all. So the short-sale actually preserves some of the (lack of) integrity of the homebuying process, and bank can get a higher price for it than at auction. It took banks a few years to see the light though.

      • Firethorn says:

        Yep. Don’t forget that home prices are still dropping in many areas; a short sale involves less expense for them in the first place, the price of the home will likely be higher due to the earlier sell date even before you figure in the cut of the auction.

    • u1itn0w2day says:

      Cash is cash. So what if a bank only gets 200k even though the contract was for 300k. That’s still puts 200K in their pockets rather than 50k they might have to settle for if a house is put into foreclosure.

    • Bob Lu says:

      My understanding is that before you actually sell the house the bank doesn’t have to admit that it is losing money.

      Say a house with 300K mortgage and 200K market value. If you were a bank, you could:
      1. Foreclose the house, insist that you just took the 500K value house back and you can so very totally easily sell this house for 500K, you know, once the market recovers, which is going to happen any second from now.
      2. Agree a short sell, get 200K back and eat the 100K loss.

      No bank will select 2, unless it is having cash flow problem or it is convinced that the house market is not going to recover.

      • u1itn0w2day says:

        Cash flow problem.

        CASH is king. CASH is CASH. It’s sort of like a clearance sale I guess for the bank. You can only benefiit from so many tax write offs. Sooner or later you need actual income/cash to make a profit or have money to pay bills.

    • DabNabIt says:

      Because while the writeoff for foreclosures, short sales, and loan mods might be the same, the feds reimburse them for foreclosures only. So I was told by a financial lawyer. Why the guvmint would set up the worst possible incentives is a mystery to me, but on the other hand, they aren’t known for being useful to the public.

  2. chucklebuck says:

    Damn – we’re current and able to afford our underwater house, but if my bank offered me $30K to walk away from it, I’d be out the door ASAP!

    • Nigerian prince looking for business partner says:

      We’re current and not even underwater. If my bank offered me $30k in cash to walk away, we’d be out by the end of the month.

    • ARP says:

      Hell, they could give me $2500 and I’d be out the door in a two weeks.

    • Loias supports harsher punishments against corporations says:

      If I could get back the money I’ve put into the house in repairs and updates, essentially breaking even and treating the mortgage as a rental cost, I’d be out the door.

    • SmokeyBacon says:

      Yep, I would seriously consider it. We are current and not having a problem paying, but if they were basically paying me to get out of our house who’s valuse is quite a bit less than what we paid, I would sure as hell think about it.

    • Dave on bass says:

      You ain’t kiddin’. I’m 50-60K underwater on mine but I haven’t ever missed a payment and my rate is fine so nobody can hook me up. I want to move out of the area but I can’t sell…

  3. pop top says:

    “It’s been nearly a half decade”

    Just say five years. :|

  4. rpm773 says:

    Bloomberg has the story of one underwater homeowner who received a letter from JPMorgan Chase declaring, “You could sell your home, owe nothing more on your mortgage and get $30,000.”

    Pfft. If I got something like this in the mail, I’d
    a) first think it was a scam, or
    b) would assume the bank would screw it up, and I’d be dumped onto the street.

    • Jevia says:

      Or you’d get issued a 1099 form next year and be forced to claim the “forgiven debt” as income and pay taxes on it.

      • Not Given says:

        Wouldn’t the $200k forgiven on the mortgage and probably the $30,000 still be less than the loss of the home’s value? After all, it’s being sold for less than the homeowner bought it for, too.

  5. Loias supports harsher punishments against corporations says:

    A few years too late. We were telling them this when the market crashed.

    • castlecraver says:

      Had to make it look like a bailout was the only option before actually doing any damage control themselves.

  6. evilpete says:

    Given all the bad foreclosure paperwork it may not be possible to foreclose on many properties,thus a short sale is the only option for the bank.

  7. Thyme for an edit button says:

    So she took the deal and the bank sold her home for $200,000 less than what was owed on the mortgage ‚Äî and she walked away with $30K that she’ll be using to move and make a deposit on the rental she’ll move into once she closes later this week.

    Does she get taxed on the $200,000 that was forgiven?

    • mattyb says:

      That’s probably what the $30,000 was for. Ha!

      • u1itn0w2day says:

        I was gonna say isn’t the 30k taxable income? Still want to know what happens to your credit score if you bail.

    • HSVhockey says:

      The 2007 Federal Debt Forgiveness Relief Act will let her slide on taxes presuming this is her primary residence. JP Morgan will do a 1099-C and she will file a form 982 and it will all be good. That is what I did for my first mortgage on my short sale in 2010, and I finally got the 1099-C for the HELOC which I will be filing this year and I should not pay taxes on it either. I wish I would have gotten this offer back when I was forced to move across country to keep my job, would have saved me a lot of hurt and would have given me back most of my downpayment I put on the house.

    • YouDidWhatNow? says:

      No…there’s protections in place for such forgiveness of loans on real estate. It’s different than getting a settlement on your credit card.

      • Nigerian prince looking for business partner says:

        I’m surprised there’s a special status for real estate. When I was in the Army, my state forgave around $5,000 worth of student loans for serving in a combat zone and I still had to pay taxes on that amount.

        • Kate says:

          The real estate isn’t worth it, that’s what went away, the value of the property is lower now, so you didn’t get anything of value if they forgive you the loan. You got the value of the education or the products you bought on credit.

          There’s a difference there.

    • u1itn0w2day says:

      Even if the feds forgive the tax on the forgiven debt what about local or state taxes on the sale of assets which include things like property. And the credit score. I can’t imagine the credit industry not finding a way to rationalize a ding on your credit score.

      • Not Given says:

        They can only tax an increase in value. That’s why you always (in the past) had to keep all your receipts for improvements, because you are taxed on ‘price you sold it for’ minus ‘price you bought it at’ minus ‘what you spent to improve the property,’ like adding a room or remodeling the kitchen. A short sale by definition is taking a loss, not just for the bank but also for the homeowner.

    • Clyde Barrow says:

      Thru 2012, forgiveness on the debt is being offered by the IRS. Not sure if they’ll extend this priviledge.

    • Wesley says:

      You’re not taxed on foreclosure or short sale, as long as the house you lost is/was your primary residence. So, the $200,000 short isn’t taxable but the $30,000 is a different story. I’m not sure what the deal is with that. Still, I’d pay the 15% (?) tax to get the $30,000. It certainly doesn’t cost THAT much to move and put a deposit on a new place.

  8. Cat says:

    What the hell? If the bank sold her home for $200,000 less than what was owed on the mortgage, how much was that mortgage?

    These are the kind of people who caused this crisis, and they get a “get out free” card and cash?

    • crispyduck13 says:

      Article says they’re letting her sell for $592k, $200k less than owed plus the $30k to GTFO.

      Personally I’m curious as to whether her credit would continue to suffer. Will this show up as a settlement? Paid as agreed?

    • HSVhockey says:

      Where do you live? Cause I would love to punch your stupid ass.

      Not everybody who was in this situation was irresponsible. And have you seen the difference in home prices from 5 years ago? I bought mine in 2007 for 80% of what it was going for a year previous and though I was doing a responsible deal. When my company told me in 2010 I had to move 2000 miles away to keep my job, I short sold my house for 54% of what I paid for it. I put a ton of money down and a ton of money into fixing it up, basically years of savings gone up in smoke.

      And before you say quit my job, there aren’t a ton of options in my field that pay as well as my job pays, so if I would have found another job locally I would still have been fucked.

      I hope your fucking high horse throws a shoe and hits you square in the head.

    • HSVhockey says:

      Where do you live? Cause I would love to punch your stupid ass.

      Not everybody who was in this situation was irresponsible. And have you seen the difference in home prices from 5 years ago? I bought mine in 2007 for 80% of what it was going for a year previous and though I was doing a responsible deal. When my company told me in 2010 I had to move 2000 miles away to keep my job, I short sold my house for 54% of what I paid for it. I put a ton of money down and a ton of money into fixing it up, basically years of savings gone up in smoke.

      And before you say quit my job, there aren’t a ton of options in my field that pay as well as my job pays, so if I would have found another job locally I would still have been fucked.

      I hope your fucking high horse throws a shoe and hits you square in the head.

      • HSVhockey says:

        I didn’t mean to double post, but I also wanted to add that my comment is in response to your (and others’) overall attitude about the subject in this story and the massive mortgage settlement story.

      • Cat says:

        Did I point my finger at YOU, specifically? NO.

        I feel bad for what happened to you, and you should also be angry – but not at me, at the banks and the people that made bad decisions that caused your home to lose so much value.

        Trust me, I feel your pain, I’m upside down on my home as the result of my own responsible decisions, too. And I am pretty much as stuck in my job as you are, as bad as it sucks.

        • HSVhockey says:

          No you didn’t but your blanket statements felt like it covered me. Apologies for the angry reaction. I’m not really good at managing my rage and I’ve had this argument with people in person before and it has literally gotten physical.

          • Cat says:

            I think it’s safe to say… you’re one of us, the people who acted responsibly but got screwed over – and yet we get nothing out of all these deals.

            I think giving up hockey could help solve your rage problem (Yes, that’s /s )

      • dolemite says:

        From what I’ve seen/heard…you’d be in the minority. I got my house at the height of the bubble. People were getting their real estate licenses left and right. Everyone was buying bigger and better houses. I knew people that made like $50k a year that bought 500k houses. Everyone was doing it.

        When I got my house, my realtor and bank tried their best to talk me into getting as much house as I qualified for, but I bought one at 1/2 of what I qualified for, just to be safe. Now all those people that wanted to impress their family and neighbors are up the creek and the government is demanding bailouts for them too?

      • u1itn0w2day says:

        Anyone who followed business news let alone real estate knew markets in California and Florida had stalled by 2005. The warm weather states tend to lead the country in trends. Even the pop culture picked up on all the house flipping. It was a fad.

        It still comes back to overpaying for an investment instead of a house to actually live in. If you wanted shelter AND appreciation on an investment that’s on you. You’re just as greedy the corporate whores that wrecked this economy with an unwiley sense of entitlement. If you chose a career or picked a vocation that required travel and relocation no matter remote THE POSSIBILITY YOU should suffer the known consequences.

        All these people are guilty of not fulfilling the contracts they agreed to. They are guilty of feeling entitled to a pardon. They are guilty of wanting the rules of game changed after they start losing.

        G U I L T Y !!!

        • HSVhockey says:

          What the bloody hell are you running on about? I usually don’t feed trolls *but* here are some notes for you concerning assumptions you made that have nothing to do with me (maybe they will help you construct an argument better in the future):

          - “it still comes back to overpaying for an investment” Who said anything about an investment. I sure didn’t. This was my first house and I was starting a family. TRY AGAIN.

          - “If you wanted shelter AND appreciation on an investment that’s on you” Again, where did I say anything about expecting appreciation? TRY AGAIN.

          - “You’re just as greedy” Fuck you. TRY AGAIN.

          - “If you chose a career or picked a vocation that required travel and relocation” Again, what the fuck are you talking about? You have no idea what my job entailed. Travel, really? I maybe took a one day trip to DC for work every couple of months. Fuck you. Relocation? Yeah cause everybody is privy to the thoughts of their CEOs when they start work for a company with 70,000+ employees.

    • sirwired says:

      They get a “get out of your underwater house free” card because a foreclosure would cost the bank even MORE money.

    • u1itn0w2day says:

      I can understand the banks trying to get something rather than nothing but it is a get out of jail free card for a bad decision. Ok the bank forgives but why should the taxpayers forgive a bad business decision based on ignorance and greed. Are the banks going to get a write off on a short sale too costing the taxpayers even more?

    • Mrs. w/1 child says:

      What Cat said.

    • stinerman says:

      Yes. If enough people are irrational and crash the market, it’s better for the economy as a whole to bail out the people who crashed the market than to “make them pay”.

      See also “life isn’t fair” and “nice guys finish last”.

  9. areaman says:

    “Yea never understood why they fought short sales for so long.”

    I’m guessing it’s because the banks had their heads buried in the sand, waiting for the conditions to get better.

    This news looks like an indicator the banks accept at some level 10% per year appreciation in housing prices are not coming back.

  10. homehome says:

    Of the ppl owning buyouts, I wonder how many of them are going to be trying to buy homes in a year and make the same knucklehead mistake.

  11. Dallas_shopper says:

    I’m current and not underwater but I’d take $30k in a heartbeat to sell.

  12. Loias supports harsher punishments against corporations says:

    “But according to Bloomberg, banks have come to see that it might make more sense to unload the property ASAP”

    ASAP in bank-speak apparently means 4 years.

  13. f86sabre says:

    Probably just means they know the really big dip is coming and they want to try and move a little product quickly. Or maybe they are just coming to their senses.

    • ChuckECheese says:

      Big dip coming? Wow, townhouses in Phoenix are selling for less than $20K. Homes purchased long b4 the bubble are depreciated 30% to 50% below their 2000 prices. Soon we’ll pay you to take a house.

      • f86sabre says:

        I usually don’t jump in with the foil hat brigade, but that was the notion that popped into my mind when I read the story.

    • u1itn0w2day says:

      Cash is cash. Cash in hand is better than a tax write off in many cases.

  14. sirwired says:

    Finally, some sense!

    Why are they doing this? Because they’ve finally realized that foreclosure, followed by the inevitable stripping of the house of appliances and piping (either by the soon-to-be-ex-homeowner or thieves) is even MORE expensive than a short sale and incentive payment.

    • JayDeEm says:

      Came here to say this. I saw plenty of broken windows and missing appliances in my neighborhood as the crash was really taking hold. Better for the bank to have some control over the situation, especially in cases where the buyer is leaving one way or another.

      • u1itn0w2day says:

        That’s my thing. I think foreclosure expenses and unpaid balance tax write offs only go so far. Cash is cash. I think the shear volume of foreclosures and short sales has forced them to rethink what is probably a much older policy/practice. In the end cash is king even if it’s not what they expected because some cash is more than they would’ve gotten otherwise.

  15. Matt79 says:

    So how do I go about convincing my bank to let me do a short sale when I’ve yet to miss a payment? I relocated for a new job…and while I’m making payments…I can’t keep it up forever. Seems it would be in their best interest to help me out now while I still can afford to work with them…rather than wait until I just stop paying them altogether.

    • Clyde Barrow says:

      @matt; same here except that I cannot relocate until I sell the house. What are the banks going to do for us? I could move to pretty much anywhere in the country with my job but I am stuck. I never intended to live in my house until I retire and I certainly don’t want too either.

      Wells Fargo recently refused the offer made on my home for a short-sale and I am screwed. No what Wells Fargo?

  16. u1itn0w2day says:

    No credit score ramifications?

  17. RickinStHelen says:

    When I had to move for work, I ended up doing a short sale. Nationwide was my mortgage holder. After trying to sell the house, it became apparent that it would not sell for the amount I owed (this was 2009 in Oregon). I worked with Nationwide., kept the home in showable shape, and a buyer made an offer that was accepted. It took about nine months from the time we realized the market was crashing, and three months after an offer, to the time someone bought it. I was looking at Zillow the other day, and the prices in that neighborhood have declined even farther. Home that had listed for $390,000 in 2006 are now down around $180,000, and still falling. If Nationwide had not accepted the short sale, they would have spent more and gotten less. Don’t think of it as someone getting over, think of it as a way out of this housing mess that is better than straight foreclosures that hurt everyone.

  18. The Cynical Librarian says:

    That’s just fantastic as 6 mos. ago the bank denied our short sale (for relocation/family issues) and pretty much gave us the finger when we tried for a deed in lieu. All of this home news today is making me angry.

    Who needs a drink?

  19. Clyde Barrow says:

    Banks? Which ones? Certainly not Wells Fargo.

    How about WF? Offer me $30k and you can have my house also.

  20. Wireless Joe says:

    Screw that. They should be giving the $30K to the buyer, or at least splitting it.

  21. SoCalGNX says:

    Not bank of america. they will tell you the short sale is a go on thursday and foreclose on tueday. if you ask any questions you will get lied to and the run around.

  22. lettucefactory says:

    She already got 30K and she’s eligible for another 3K? On top of what she already saved from not making payments for a year? I’m all about anything that makes short sales easier – it’s better for everyone if short sales are a realistic option – but I don’t understand the 30K payout on top of it. They’re calling it “relocation assistance,” but even in a high COL area, and even if you hire professional movers, 30K is way more than you need to find an apartment and move in.

    Of course, the article mentions that it might just be a payoff in situations where the bank doesn’t have the proper paperwork to win a foreclosure case. Though of course the bank doesn’t admit that. I guess it’s worth it to spend an extra 30K to get the delinquent owner to slink away quietly in that circumstance.

    But as someone who has been renting all along….DAMN.

  23. ned4spd8874 says:

    I’m 50k underwater and will probably have to sell within the next couple years…should I start looking into this sort of stuff now???

  24. Negative says:

    I wish this had been around back in 2008. Got divorced (not by my choice). Ex-wife stopped helping with the payment and walked away. I immediately started calling Citi to try to work something out. The house payment was a little out of my range to make on my own and I just needed them to work with me a bit. I owed about $500,000 and I could afford a payment that was in the range of a $400,000 house. I tried to work with them for months. Tried to sell it, tried to short-sell it, tried to work out a deal that I could afford. Nothing worked. The only deal they were willing to look at was to drop my interest rate for 5 years and then jack it back up. It just wasn’t enough. I finally gave up and walked away. Two years later they finally sold it for $300,000. They lost out on $100,000 – $200,000 (depending on the deal) and I lost my house and my credit score. I just wish they would have taken a minute to look at my proposal. We might have been able to make the whole thing a win-win (or at least close to it) but all they had was CSA’s with scripts and no decision making ability. It was terribly frustrating.

  25. diagoro says:

    I don’t believe this is Chase/JP Morgan/EMC either. Finished a short sale a few months back (after 15 months). EMC/Chase was supposed to give me $3000 to help move out/relovate……and they basically denied it to me at the last minute (it was ‘accept our terms or we’ll foreclose’ at the last minute, which would have screwed the buyer).

  26. HogwartsProfessor says:

    I can’t sell my house until I get the bathroom remodeled. I can’t afford to remodel the bathroom and just lost my job. I didn’t buy a giant over-expensive house; I bought a tiny one with payments that are less than most rents around here. Now I kind of wish I did.

  27. batman381 says:

    Back in 2010 Chase told me I didn’t qualify for a short sale since I wasn’t behind on my payments. I was moving due to getting out of the military and moving out of state for a job. In order to save my credit I became a instant landlord and thankful I have great renters, but I am still losing money ever month due to the rent rates in the area, but I am saving my credit score and meeting my financial commitments. When arriving in my work state I found It was cheaper to buy a house vice renting. So fast forward to now and I have talked to Chase several times and even went through their military helpline and was told if I didn’t buy a house where I move to I could have refinance the other house with out coming up with 80K down payment, because now it is consider an investment. Really, all I want to do is meet my financial commitments, but if the tenants move or when the ARM kicks in I am not sure I will be able to do that, but I try not to think about that because it stresses me out. So for now I am keeping my fingers crossed and hope the tenants continue to make the rent and not move when the lease is up, but come February 2014 the ARM kicks in and then it is a big guessing game. Hopefully, the current tenants will be able to buy the house before this happens.

  28. bobloblaw says:

    are you sh*tthing me? I’ve been trying to complete a short sale, under contract for over a year. Sovereign bank isn’t one of these banks who have got it togehter yet.

  29. neilb says:

    Meanwhile, our responsible family is deciding to rent our home. Why bother buying when:
    1) Price deflation outpaces the difference between rent and taxes,
    2) You are absolutely totally screwed should you have to move, and
    3) So many people are holding houses that awesome rentals are plentiful and cheap.