The Obama administration has come up with a radically aggressive plan to reduce foreclosure activity which has remained alarmingly high. The key ingredient is to encourage lenders/services to allow more short sales – selling the home for less than the amount of the mortgage without going after the debtor for the shortfall. Mortgage modification plans have not been successful to date.

The New York Times page 1 story today Program Will Pay Homeowners to Sell at a Loss does a masterful job in presenting the program and summarizing the problems of the issue to date, I just wish the title wasn’t so simplistic.

Perhaps I am missing the point, but I feel like this solution has focused on the wrong side of the mortgage default equation. Are servicers going to forgive $200,000 in principal to get $1,000? Are homeowners going to move forward because they get $1,500 (more than the servicer) in relocation fees?

The flood of short sale requests are already overloading many bank’s ability to handle the administration of this crisis – hard to see them able to manage the process any more efficiently.

However, the only way out of this crisis is a solution with principal foregiveness in the equation or people will simply walk away and perhaps the servicer/lender ends up being hurt more. No easy answer I suppose.

Real estate agents will determine property value

One mechanical aspect of this process which demonstrates the administration’s and government in general’s disconnect in the need for neutral analysis of value. Real estate agents, who are paid to sell property, determine the “reserve” price above which the lender/servicer must adhere to.

Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.

Mr. Paul, the Phoenix agent, was skeptical. “In a perfect world, this would work,” he said. “But because estimates of value are inherently subjective, it won’t. The banks don’t want to sell at a discount.”

How about a neutral party in the process? A qualified appraiser? (not the yahoos doing AMC work in high volume). I would assume the agents selecting the number are not allowed to sell the property (huge assumption on my part) but why not have someone who can’t ever sell the property, whose full time job it is to estimate market value, be assigned that task?

The devil is in the details.

Tags: ,

6 Responses to “[New Mortgage Program] Getting Paid To Sell Short”

  1. Heather F says:

    The 20-something (smart but inexperienced) staffers writing policy might be the core problem at hand. And I do think your assumption about the agents not selling the home is generous! Arbitrary policy making at its best.

    • Jonathan Miller says:

      Its funny you say that – I had the exact same gut feeling. In fact a bunch of housing related regulatory-speak has the same tone.

  2. Jessica Beganski says:

    Real estate agents do not determine the value of real estate. Buyers do. An agent will determine an asking price but so often that is incorrect – which is why we have price reductions on properties priced too high and multiple offers when a property is priced too low. I can say a house is worth XYZ but if no one wants to buy it, my opinion is worthless.

    In my opinion, the administration needs to focus on the real problem – jobs, the creation of wealth and maintaining wealth. The issue we face in the market today would largely be solved if more people had the money to buy homes. However, we have fewer people in the market for homes today because of high unemployment and an overall feeling of what’s next – higher taxes?

    Encourage job creation and there will be more buyers out looking for homes, who will buy up the foreclosures & short sales.

    • Jonathan Miller says:

      Very well put – the idea should be to have a neutral party estimate the value of a property. And I agree with you 100% – no bandaids for foreclosure crisis – need job creation in a huge way. Otherwise this problem will languish for the next decade.

  3. Tonnage Tuesday links and a stream of consciousness mission « Closer To Pittsburgh says:

    […] Program will pay homeowners to sell at a loss – For critics that say the federal government’s foreclosure abatement programs have simply drawn out the inevitable and delayed the full correction in housing prices and subsequent recovery, the latest idea is a step in the proper direction, but it looks like a small one.  Essentially, the proposed program would provide small amounts to the mortgage lender, secondary lienholders and the homeowner as an incentive to proceed with a short sale.  Like other measures to address the foreclosure problems, how successful this is will depend on details, how quickly it can be implemented and whether there are enough funds available to offer a meaningful incentive.  Another take on this from Matrix is here. […]

  4. President Obama’s housing plan is only good in paper. Presently, it is still a win-lose situation in favor of the banks. Mortgage banks are not that wishy-washy to let the borrowers walk away just like that; better for people to end up homeless than losing business. The administration’s programs were suppose to help people keep their homes, not sell them.