This article continues our series on shortsales and examines the cash-for-shortsale program banks have begun to offer to select groups of underwater homeowners as an alternative to foreclosure.

Do you personally know a homeowner whose bank offered him a cash incentive to complete a shortsale on his underwater home?

  • No (61%, 48 Votes)
  • Yes (39%, 31 Votes)

Total Voters: 79

The cash-for-shortsale program

Word on the street has it banks have been offering homeowners cash incentives to pursue a shortsale on their underwater homes. Well, the word got around.

The cash-for-shortsale program has not been loudly advertised since early 2011 when some homeowners began to receive letters about the offer. It seems banks such as Chase and Wells Fargo have been quietly notifying a select set of “qualified” homeowners about the cash incentive, taking shape in the form of a payoff which is stated to be as much as $35,000 from Chase and $20,000 from Wells Fargo. The program has been contrived to be a means of stemming the banks’ amounting backlog of foreclosures. The banks also see it as an economically prudent arrangement which costs less, processes faster and makes a home more marketable for resale. [For more information on what banks like Chase and Wells Fargo have reported so far about the program, see the NY Times article, Getting Cash in Exchange for a Shortsale.]

The banks also see it as an economically prudent arrangement which costs less, processes faster and makes a home more marketable for resale.

For some homeowners, the cash incentive augments additional funds they may be eligible for from the government’s Home Affordable Foreclosure Alternatives (HAFA) program which gives homeowners up to $3,000 to assist with relocation after a shortsale. HAFA benefits are available until the end of 2012. As far as banks like Chase are concerned though, their program will continue indefinitely. [For more information on government foreclosure assistance programs, see the June 2010 first tuesday article, Cal-HAMP: how $700 million of federal aid is proposed to be allocated in California; for more information about HAFA requirements, see the October 2011 first tuesday article, You’re sure you’re a shortsale specialist?]

Too good to be true

The sharp and sensible student will look at the bigger picture of this program as a viable pre-foreclosure workout and ask this important question: why are banks willing to put the cash-for-shortsale deal out there?

Chase and Wells Fargo have said processing a shortsale versus a foreclosure saves time and money. This is true. (Yet an argument could be made now in regards to it being a time-saver since the average length of a shortsale has gotten longer.) [For more information on the shortsale procedure, see the October 2011 first tuesday article, How to facilitate a shortsale transaction.]

But the banks are using smoke-screen warfare to deflect from having to negotiate the other alternatives available to keep loans on the books and underwater homeowners in their homes (if they have a job, which most remaining homeowners do in this Lesser Depression). For most of California’s 2,500,000 million negative equity properties, the purported cash-for-shortsale program is not a realistic exit strategy.

When the pre-foreclosure workout doesn’t workout

The clear alternative to keeping the employed and negative equity homeowner in his home – which most homeowners seek at this point – is a loan modification in the form of:

  • a reduced monthly payment fixed for the  remaining term of the original 30-year loan period at 31% of the homeowner’s current income;
  • a reduction of the interest rate to current market rates of around 3.5-4% (or the historical 1.5% spread above the 10-year Treasury note which would be around a 3.25% mortgage rate) and fixed for the life of the loan; or
  • a principal reduction in the form of a full cramdown adjusted to the home’s current market value as determined by an appraisal ordered out and paid for by the lender.

On the other hand, if the homeowner wants out of the negative equity home but is so well employed as to actually qualify for the mortgage amount remaining due on his underwater home, the sole alternative made available to him by the lender is to walk away— that is, to strategically default on the loan payment and force the lender to take the property at a foreclosure sale.

Of course lenders will not advise homeowners on this alternative, let alone mention it (even though Californians reserve the legal right to do so as provided by the put option provision in the trust deed on their homes). Instead, lenders will preach the rentier mantra: default is a heinous financial sin for which the penance is banishment by a most unforgiving dent on their Fair Isaac Corporation (FICO) credit scores. A strategic default has nothing to do with morals or ethics, but lenders push this unfounded dogma and will see to it your FICO score is punished for a couple of years. [For more information on the conflicting interests of banks and lenders and homeowners, see the September 2011 first tuesday article, Rentiers and debtors: why can’t they get along?]

Those employed who want out of their negative equity home will do well to note a strategic default is merely a savvy, corporate-like business decision which is better for the economy. And frankly, contrary to the common myth perpetuated by lenders, it will have the same effect on their credit score as a shortsale will. [For more information on the study regarding the impact of shortsaleshortsales and foreclosures on credit scores, see the July 2011 first tuesday article, Strategic default smarts.]

Shortsale homework for brokers and agents

For the few homeowners who rip open their mail and find one of the exclusive golden tickets to the cash-for-shortsale bargain factory, consider yourself a blessed Charlie Bucket. At last, lenders may be considering pre-foreclosure workouts as a beneficial policy.

Since these pre-foreclosure workouts are still experiments and banks are being all hush-hush about it … brokers and agents have some investigative work to do.

Since these pre-foreclosure workouts are still experiments and banks are being all hush-hush about them (Chase doesn’t even have a name for them yet), brokers and agents have some investigative work to do. Right now they need get the facts on:

  • how (and why) the banks are going about this;
  • what type of loan the banks are targeting (probably those five-year rollover and hybrid option loans);
  • what stage of delinquency is considered for the program; and
  • which financial profile the homeowner has to fit.

Editor’s note – Dear reader, if you have any stories on the cash for shortsale bargain in California, do let the rest of us in on it by a comment. If it is true, then the voluntary cramdown of principal for those negative equity homeowners who want to remain in their home is just around the corner from the next rush in foreclosures and real estate owned (REO) inventory. (Lenders eventually get it— the operative word being eventually.)