Strategic Short Sales: What’s Happening?

Strategic Short Sale Stats

As predicted here and elsewhere, strategic short sale, that is to say voluntary, non-hardship short sales, are increasing. Analysts for Morgan Stanley say that strategic short sales represented about 12% of all defaults in February 2010 as opposed to 4% in 20007.

Further, the higher the borrower’s credit score and the larger their loans, the more likely they are to stop paying their mortgages. Possibly, that reflects both the greater financial acumen of these high-dollar homeowners as well as their greater range of housing options once they are out from under their loans.

Across the country, about 15 million homeowners are either behind in their payments or in some stage of foreclosure.  Across the country, about 20% of all homes are underwater, pointing to an endless surge of foreclosures for years to come unless something is done.

Obviously, with a tsunami of pre-foreclosures  waiting in the wings, home prices will not recover. Analysts are now predicting it will take at least 3 to 5 years for the current distressed home mortgages  now in the pipeline to clear. At that rate, ever more homes will join in.

What Is Causing the Strategic Short Sale Logjam?

Why would so many homeowners bailout on their mortgages and their homes? People do not like to give up their homes and will do anything to keep them, short of financial suicide. Homeowners take money from retirement accounts and run up credit card bills before finally realizing they can’t catch up.

Of course, most of the high-dollar homeowners have asked their mortgage holders for help. As discussed many times here, banks take many months to make their decisions, often outright refusing to help at all. Offering what these homeowners really need, a principal reduction, almost never happens. Banks really do not like to “forgive” a debt or any part of it. A contract is a contract, right?

Cognitive Dissonance: Banks and Strategic Short Sales

“Broad-based principal reductioncould result in decreased access to credit and higher costs to consumers because lenders will price for forgiveness risk,”  that piously intoned by  JPMorgan’s mortgage unit.

Not mentioned–Morgan Stanley defaulted on a a $2 billion loan two years after it bought Crescent Real Estate Equities Co. and handed over 17 million square feet of office buildings to lender Barclays Capital. Morgan Stanley also agreed to hand over  five San Francisco office buildings to its  lender, Blackstone Group, two years after buying purchase.

The biggest strategic short sale of all, though, occurred in January 2010 when , Tishman Speyer Properties LP and BlackRock Inc. defaulted on a $3 billion mortgage on Manhattan’s Stuyvesant Town and Peter Cooper Village apartments, the largest residential enclave in New York City. Its sale in 2006 for $5.4 billion marked the biggest U.S. real estate transaction.

The big financial entities so reluctant to help homeowners are themselves  the beneficiaries of taxpayer largesse and, clearly, have no problem walking out on their own mortgages.  Perhaps, when the big financial institutions stop talking out of both sides of their mouths, we can start to find solutions to this huge problem.

Short Sale Update: LA County’s Pricier Areas

Short Sales, strategic and otherwise, would seem to be the name of the game this year in L.A. County as in much of the rest of the country. With some 25% of the population now “debt-impaired” and 3 million foreclosures already accomplished, short sales are beginning to seem like business as usual.

Just wondering how the more pricey areas of L.A. County were handling the situation, I took a little tour on the MLS. Here’s what I found:

  • Malibu has one active listing of $4.5 million and 12 active  short sales priced from 389000 to $3.8 mill; 6 pending short sales, but no other pending sales. One short sale closed in the last 3 months, but no standard sales.
  • Pacific Palisades has  one active listing and 8 active short sale listings ranging up to $2.5 mill; one pending short sale , but no standard pending sales.Four short sales closed in the past 3 months and one standard sale at $3.75 mill.
  • Santa Monica has 19 active short sale listings and 14 standard, but 16 pending short sales and only 8 standards with 8 short sales closed in the past 3 months as opposed to 2 standard sales.
  • Beverly Hills shows 7 active short sale listings maxing out at $3.5 mill with 10 pending short sales up to $2.7 mill and no standard sales. In the past three months one short sale has closed, no standard sales.
  • Bel-Air has 2 active short sale listings, 7 pending short sales [up to $4.1 mill] and no sales in the past 3 months.
  • Brentwood, a larger city, has 217 active listings, 9 short sale listings, with 7 pending short sales,  but in the past three  months only one sale–a short sale, of course, for $2.9 mill.
  • Arcadia in the San Gabriel Valley shows 148 standard listings with 5 active short sales, 12 pending short sales out of 39 pending sales and in the past three months 68 closed sales with 7 short sales.

What are we to make of this? I see a number of different strands.

One, standard sellers who do  not lower their prices to short sale levels don’t sell their houses, so if you have to sell your home, it’s better to bite the bullet and price it right. If you don’t have to sell, take it off the market.

Two, in areas like Arcadia where many homeowners purchased their homes all cash or have paid off their mortgages, the crisis is less severe. If you want to live there, you will most likely do a standard sale.

Two, the short sale, strategic or otherwise, has certainly hit affluent areas.Any notion we may have had that expensive homes are somehow  immune to our ongoing financial crisis must surely be seen as wrongheaded. Owners of expensive homes, mansions, are also sacrificing. Short of calling up all these sellers or their agents, I can’t know if the sales are strategic or the result of genuine hardship. What I do know is that the rich are now as “debt-impaired” as the rest of us.

More About Strategic Short Sales

Banks do it, so why not the rest of us? That is the message not only from the famous liberal Grey Lady, the New York Times, cited in a previous post,  but now also from the notoriously conservative Wall Street Journal in an opinion piece that has the right all atwitter.

What’s that, you ask? Both papers now, from the right and the left and really the middle, are proposing that homeowners wise up and get out of their upside-down mortgages. In short, both are advocating the strategic or voluntary short sale

To go further, in my view, if the  nation is to survive this crisis, it’s very possible that short sales will soon be seen as not only the financially reasonable way out but also the most patriotic way out. Why’s that?

Recent figures indicate that 3.5% of all mortgages are already in the foreclosure process. That’s, of course, on top of the massive numbers of foreclosures that have already taken place. Add to those in the process another 9.7% of all mortgages which are now 90 days or more late and that’s an impressive 14% of all mortgages looking down the barrel of foreclosure. And, that’s not the end of it. An estimated 25% to 30% of mortgages in this country are upside down as homeowners owe more than their homes are now worth. That number is predicted to climb to over 40% in the near future.

What is the fastest way out of this mess? Obviously, the best way would be for the banks holding the mortgages to reduce them down to present value of the homes or at least somewhere close to the present value. Homeowners stay in their homes; banks keep collecting the mortgage payments.  Banks are reluctant to do this. In fact, despite the government’s HAMP program offering significant incentives for banks to modify loans, banks effectively refused by merely tweaking loans or outright refusing to touch them.

Now, the U.S. Treasury has come out with a new program which went into effect March 1, 2010. Called HAFA [Home Affordable Foreclosure Alternatives]. the program is a blueprint or set of guidelines for banks on how to process short sales. Designed to expedite the excruciatingly slow process in place to date at most banks [you know who you are, Countrywide], this may finally break the logjam of distressed mortgages that is threatening the very stability of our country’s economy.

For anyone considering a short sale, strategic or otherwise, as a way out of a personal financial morass, this may be the best time to get underway. If you are considering such a move, call me and I’ll be glad to give you what advice I can.

Trying To Keep Above Water: What is a Strategic Short Sale?

Short sales are popular. With literally millions of homeowners hit by the double whammy of adjustable loans and  financial dire straits, it’s no wonder that so many have chosen to avoid foreclosure and short sale their homes. Banks document the hardship and then agree to the sale.

But, homeowners with bad loans or victimized by the economy are not the only ones wanting to get out of their over-priced mortgages and underwater homes. In fact, anyone with the smallest touch of financial acumen has figured out that paying a mortgage double what the property is now worth hardly makes sense. Enter the strategic short sale.

Simply put a strategic short sale is a voluntary short sale that does not necessarily involve a hardship. Increasingly, homeowners are making the financial calculation that not only are their homes and properties underwater but are likely to remain so for the foreseeable future. Even if they can make their payments, homeowners, especially the more financially literate, are determining that it simply is financial suicide to stay in a home, paying on the mortgage when the property has lost half its value. Better to bail. It’s better to keep your head above water than to drown.

For those who feel it’s possibly not “honorable” or “moral” to treat the sacred contract signed with the bank so cavalierly, consider this: according to a recent New York Times article, Morgan Stanley itself made this “strategic” decision to walk away from five office buildings it had bought in San Francisco at the height of the boom. Yet, Henry Paulson, as U. S.  Treasurer, expostulated that homeowners who walk away from their bad deals are nothing more than “speculators’. Oh, right, Mr Paulson, formerly CEO of the now-universally-acknowledged odious Goldman Sachs.

Today in February 2010 about 25% of all mortgages are underwater. 10% of these mortgages are actually delinquent. Whatever you hear from the Pollyannas of real estate, those figures are likely to rise this year. Why? Simple–the unemployment rate is astronomical by our normal standards. Loan mods not only don’t work; they also require the homeowner to have a hardship, but not too much of a hardship since that would mean no money to pay the loan….The refi program isn’t working. All the wonderful ideas about helping homeowners have not helped, at least not enough.

What’s a homeowner to do? Follow the lead of the very banks to which you owe money and do a short sale. Make the calculation and decide if this is the best route for you. Today, if a homeowner is not delinquent, he can short sale his home and buy another at the same time. Increasingly, too, homeowners can get that short sale wiped off their credit reports in record time, especially if they have the money to purchase another home.

People who short sale their homes frequently have lost thousands and often hundreds of thousands of dollars of real money, not paper equity.  It’s not their fault the economy tanked. People operated synergistically with the banks in our economic ecosystem taking on the bad loans that banks offered, both in good faith at the time. Neither is totally at fault for the resulting disaster, though both are suffering, people more than banks, I dare say. In a short sale, banks get something less than the promised amount but usually 35% to  50% more than in a foreclosure.

Short sales, strategic or not, make the best sense for both parties. A classic win-win, if you will, or, more aptly, lose-lose.