Summary
Treasury is announcing new terms that they hope will encourage more short-sales. These transactions have not been very effective in the past, and while this is probably not going to be a game changer, it’s wise to expect the incentives could spur some level of increase in short sales.
Analysis
Get ready for the short sales. Treasury officials recently announced a $2,500 subsidy ($1,000 to the servicer and $1,500 to the seller) to encourage short sales as a way to clear the excess inventory. The fees are designed to help compensate the servicer for the extra effort, and to incent the seller to be cooperative and leave the home in good condition. Presumably, the Treasury is trying to help facilitate a transaction that will result in less loss to the lender than in the case of a foreclosure.
To date, short sales haven't been particularly effective for a variety of reasons, including:
1. Banks have been slow to approve the high bid, particularly when it is below the last appraisal in the banks' file.
2. Realtors typically don't want to deal with all the extra work involved in a short sale.
3. Buyers typically don't want to deal with the length of time involved in a short sale, which can take 4 to 5 months because of the bank bureaucracy.
Nonetheless, we expect short sales to increase if the Treasury department is offering incentives to encourage them, and as banks and realtors figure out how to work together.
Short sales have developed a bad reputation as frustrated buyers have had limited success. We'll see if the Treasury can change this, but we are skeptical.
Nonetheless, we suggest that you prepare your business for increased short-selling activity.
John Burns consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
