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Obama Administration Moves to Incentivize and Standardize Short Sales

Short sales are great, in theory. They can be a win-win-win situation – the seller gets rid of an unaffordable house; the buyer gets a great deal, and the bank avoids the costs and delay of another foreclosure and possible eviction. But, up until now, the short sales process has been somewhat of a mess. The lack of transparency and what often appear to be arbitrary bank decisions has turned the process into a deal killer. When it takes more than three months to even hear back on an offer, all but the most committed buyers have moved on down the road. Indeed, in many markets, a three-month-old offer is no longer close to the original market price, as a result of depreciation.

Fortunately, as part of a recent amendment to the Making Home Affordable Program, the Obama administration has instituted a new “Foreclosures Alternatives Program” designed to streamline and standardize the process by which banks agree to short sales and deeds-in-lieu of foreclosure. (A deed-in-lieu is an under-utilized arrangement in which the owner simply conveys title back to the bank in order to avoid a foreclosure.) Not only does the FAP offer some (admittedly rather minor) incentives to banks to permit short sales and deeds-in-lieu, but, according to NPR’s Morning Edition on June 2, 2009, the Obama administration intends to create “standards around the application and approval process” and publicize those standards within a month.

If it pans out, this will be great news for buyers, would-be short sellers, and the market as a whole (to say nothing of frustrated real estate agents!) It would be great if we could simply all agree to live by a set of fixed rules and reduce the uncertainty and transaction costs which have bogged down short sales and lead to unprecedented numbers of foreclosures. (Did you know that each foreclosure has been estimated to reduce the value of every property within an eighth of a mile by .9 percent? This usually equates to a couple of hundred thousand dollars in lost equity for the neighborhood. That isn’t good for anyone, least of all for the banks’ bloated REO inventory.)