The New York Times has posted an article that discusses how GMAC and Bank of America are resuming foreclosing on homes after a short break. However, the companies are still foreclosing on homes in the traditional way and not using other options, such as short sales. Short sales are when a home is sold for less than the homeowner owes on the mortgage.
Michael Powell, author of the article, mentions the particular example of Ms. Lydia Sweetland, from Phoenix, AZ, who was unexpectedly laid off and used all her retirement savings and her bank, GMAC, still wouldn’t modify her mortgage. She was unable to pay her mortgage for seven months and decided that a short sale was a better option because it would give her more time to move out of her house and do less damage to her credit score than a foreclosure would.
She owes $206,000 on her house and found a buyer who would pay $200,000, but GMAC rejected the offer and would foreclose on her home in a week. Strangely, it’s estimated that GMAC will make $19,000 less by foreclosing on her home that by going through with the short sale.
The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.
After examining their foreclosure processes and insisting they were sound, some major lenders are continuing going through with foreclosures. Several of the largest lenders have set up “complicated and balky” application systems for those interested in a short sale over foreclosure.
Worries over fraud are one reason for the difficulty of getting a short sale. Sometimes homeowners who aren’t struggling want to portray themselves as destitute and want to cut their losses on a property just to get rid of it. Or a homeowner could make a short sale to a relative and then buy it back from them, which is illegal. About 2% of short sales annually are fraudulent and cost banks around $300 million a year.
Because of such concerns, homeowners often are instructed that they must be delinquent and they must apply for a modification first, even if chances of approval are slim. The aversion to short sales also leads banks to take many months to process applications, and some lenders set unrealistically high sales prices – known as broker price opinions – and hire workers who say they are poorly trained.
This causes homeowners who want a short sale to instead fall into foreclosure. Banks are very reluctant to do short sales because they’re afraid they’re being taken advantage of, or that the market will turn around and the foreclosed home will be able to sell for a much higher profit in six months or so.
Fannie Mae, with federal funding, offers “cash incentives to encourage servicers…to approve short sales.” However, an email from a Bank of America spokeswoman says that they have processes only 61,000 short sales this year.
If you have further questions or concerns, feel free to contact us through our website or by calling 205-879-2447. You may also obtain a copy of our free book on stopping wrongful foreclosures and the problems of hidden fees by emailing us.
You can join our Facebook Fan Page – Alabama Consumer Protection Attorneys where we share useful information about the same types of issues that we cover in this blog.