Why Banks Don't Want to Do Short-Sales

For some time now I have been noticing that the repsonse time and quality of responses from the major banks on short-sales have been deteriorating. Short-sales are just simply taking longer and getting much harder to complete successfully. Bank negotiators seem to be less responsive and negotiations seem to be less flexible. It seems thatmore and more often a home doesn't sell as a short-sale and then a few months later re-appears as a bank-owned foreclosure and sells for less than the offers it received when it was listed short. Why would a financial institution elect to go this route and seemingly lose money?

Last April the government changed the accounting rules for Mark to Market. Essentially what this did was to give the banks more leeway in when they marked down an asset (a mortgage) that was valued at less than its face value. If a bank re-negotiates a mortgage with an home-owner, they must write-down the value of that loan immediately when the loan is re-negotiated. If a bank agrees to sell a property below the mortgage value (i.e. a short-sale) and "forgive" a portion of the existing loan, they must write-down that loan to its short-sale value (less costs of sale) immediately. But while holding a mortgage, even one where the mortgagor is not performing or paying the monthly payments or one where the market value of the collateral (home) is less than the amount owed, the value of the loan as recorded on the bank's books can be the full amount of the mortgage. Real-time mark-to-market has been suspended. Even after a foreclosed property is sold, the bank has some discretion in when it must report the write-down of the loan.

So all this revolves around the timing of the write-off or write-down. For most of us it makes better sense to sell now for more rather than later for less (i.e. take the money and run makes more sense in these cases). However, to the banks, the government requirement that they maintain a certain amount of assets compared to their liabilities (deposits) coupled with the lack of mark-to-market requirements, makes for interesting choices. If they mark down the mortgage (asset) then they have to raise additional capital somehow (likely by selling stock or similar) to compensate and maintain the required asset amounts. The total portfolio of assets and the capital and investment income (stock share price) that these asset valuations can influence apparently is sufficient to trade off a few million (or billion!) dollars of mortgage write-off for time. The banks win and the home-owner / seller (and in many cases the potential home-buyer) loses. I bet that there are periodic bulletins issued inside the banks that tell their negotiators how much of a write-off (in percentage terms) they can negotiate given the forecasted asset to liabilities ratios, etc.

Home Buyer Tax Credit Clarifcations

The recent expansion of the Home Buyer's Tax Credit has created some confusion in the market regarding who qualifies as a "current homeowner". There have been several erroneous descriptions in the press but checking the IRS link to the tax credit http://www.irs.gov/newsroom/article/0,,id=206293,00.html.) one finds the following restriction :
If a homeowner has owned, or had a financial interest in, their principal residence for the last three years prior to purchasing a home that may in all other respects qualify for the Home Buyers Tax Credit, the new home purchase is NOT eligible for the credit. If they owned their principal residence for 5 of the last 8 years (but not the last three years!) then they are considered a "current homeowner", not a first time buyer. In other words if they own a home that up until 3 years ago was their principal residence, but they have not used it as such for the last 3 years, they are considered "current homeowners". First time buyers have not owned a home (I believe that means "any home") in the last 3 years. The difference is that "current homeowners can own or have a financial interest in properties that have not been their principal residence for the last 3 years.
The law elsewhere specifically eliminates using the credit for acquiring investment properties. To qualify, the property MUST become your principal residence (the purchase of a duplex may qualifyfor the credit on that portion of the property that you live in). The restriction described above eliminates the credit on the purchase of any property IF you currently live in your owner-occupied principle residence. Apparently the law is intended to get people back into home ownership, not increase investment purchases or vacation home purchases.
As always, check with your accountant for tax advice on any real estate transaction!

Is Now the Time to Buy?

Today's manufacturing news was a definite lift to the markets as it reported the third consecutive monthly gain in the manufacturing sector. If this trend continues, employment will have to increase to keep up with demand. And umemployment is today's biggest dead-weight on the real estate and stock markets.
The government guaranteed mortgage rate limits were renewed last week at the existing maximum of $729,000. Set to expire this December, they have been extended through Dec. 31, 2010. This is great news for the middle tier of our local market.
There is no news as yet on the $8000 first-time-homebuyer tax credit which is set to expire in 28 days. Personally, I dont believe that this will be expanded to all buyers nor will the credit amount be increased. I think its a 50-50 chance that the Congress will extend the existing tax credit as it stands. While it has definitely been ONE OF SEVERAL incentives that has helped the real estate market at the entry level, I believe it's somehat like the "cash for clunkers" credit that basically stole future car sales and brought them into play earlier. Whether any more cars (or homes) will be sold over time due to these incentives is not clear; only time will tell. But the data now available shows mixed results.
Nonetheless, many signs point to continuing support for home sales. Inventories remain at low levels in our area, especially in the entry and middle tiers. Even high end sales are happening and at a pace that just about equals the number of new listings coming to market. It's in vacant land sales that we are still seeing weakness, primarily due to lack of available loan money.
If employment begins to rebound, look for continued increase in home sales and more pressure on inventories. While rumors of increased foreclosures remain in the media, we have in fact seen very few new foreclosed properties come to market. There has been a continuing rise in the number of Notices of Default issued, but I am also seeing more of these be resolved lately prior to foreclosure.
With the government slowing its purchase of mortgage-backed securities (set to conclude in March 2010) mortgage interest rates must start to climb soon. So far there has not been any other significant source of buyers for these securities and supply and demand will force rates to rise to attract more buyers.
We have said it many times before, but it bears repeating; NOW is a GREAT TIME TO BUY a home. All the signs point to higher total costs for home purchases in the coming year. Whether its selling price or interest rates that rise, the effect is the same. There is pent up demand in the market for both new buyers and trade-up buyers. I dont foresee a quick return to the levels of 2005 or 2006 in terms of total units sold annually, but I do see more pressure on the existing inventory, especially the nicer properties, in the next year.