Banks paying homeowners to sell

This post comes from Marilyn Lewis of MSN Money.

Banks appear to be waking up and making efforts to rid themselves of troubled mortgages. And what's good for banks is also suddenly looking good for homeowners.

Banks are encouraging delinquent homeowners to sell their homes for less than they owe, letting them walk away from the debt. What's more, in some cases banks are offering delinquent homeowners cash -- typically $15,000 to $35,000 -- to do a short sale. It's not clear how widespread the practice is.

Banks are nudging potential sellers by preapproving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, Bill Fricke, a senior credit officer for Moody's Investors Service in New York, tells Bloomberg.

Riverhead, N.Y., real-estate agent Kris Pilles said that in his work approaching delinquent homeowners to sell on behalf of banks, mortgage servicers and hedge funds, he saw a homeowner offered $92,500. In exchange, owners are expected to keep up the homes and yards while the properties are for sale.

Foreclosure is a big expense for banks. Consumers have long wondered why banks shun alternatives like short sales or forgiving a portion of the mortgage debt. Now, some banks -- in some cities for some homeowners -- appear to be coming around.

Bloomberg explains:

Losses for lenders are about 15% lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody's. The (short sale) deals accounted for 33% of financially distressed transactions in November, up from 24% a year earlier, said CoreLogic Inc., a Santa Ana, Calif.-based real-estate information company.

These cash payouts aren't common. Not yet, anyway. They may be just a tactic in isolated situations where banks believe they have few other options to extract a borrower from a home. (Post continues below.)

Still, the tales make compelling reading. Bloomberg tells of Karen Farley, 65, who was a year behind on her mortgage payments when her bank let her -- no, urged her to -- sell her home in San Marcos, Calif., for $592,000, about $200,000 less than her debt on the property.

"You could sell your home, owe nothing more on your mortgage and get $30,000," JPMorgan Chase wrote Farley in an Aug. 17 letter quoted by Bloomberg.

In addition to the $30,000 from Chase, Farley was also in line for a $3,000 federal incentive. HAFA, the federal Home Affordable Foreclosure Alternatives program, pays a "borrower relocation incentive payment" of $3,000 to qualifying homeowners in a short sale.

Banks offering cash

Several banks are using cash incentives.

CNNMoney tells of Angelique Pierce, Rancho Cordova, Calif., whom Chase Mortgage offered $25,000 to sell her home:

After Pierce became disabled a few years ago and had to stop working . . . she fell behind on payments on both her first and second mortgages, valued at $250,000 and $50,000, respectively.

Now, she's trying to sell her three-bedroom ranch for just $95,000 -- almost half of the $179,000 she paid for the place in late 2002.

Pierce found a buyer, but the holder of a second lien on the home wanted a share of the bank's incentive, CNN says. Chase "balked" and the sale fell through.

Bloomberg spoke with 12 real-estate agents in Arizona, Florida, New York, California and Washington and learned that JPMorgan Chase "generally" pays incentives of $10,000 to $35,000 at settlement for short sales.

Also:

• Bank of America ran a pilot program in Florida last autumn, according to CNNMoney. It paid $10,000 to $20,000 to certain homeowners to sell their homes. B of A may revive and expand the program.
• Wells Fargo offers homeowners $10,000 to $20,000 for short sales or deeds in lieu (in which the bank takes the home's title.) But the incentives are only in some states.
• Citigroup offers qualified borrowers about $3,000, a spokesman told CNNMoney. "Investor programs have different guidelines for relocation incentives, which we honor," the representative said by email.

As nice as a five-figure pile of cash sounds, it's not always the best strategy for a homeowner.

Explains Jeff Gelles in his Inquiring Consumer column in The Philadelphia Inquirer: "Homeowners who want to stay in their homes and can afford payments would be much better off with direct principal write-downs, of course, rather than the after-the-fact variety entailed in a short sale."

Switch in tactics

Banks aren't discussing their motives. But it's fun to speculate about why they're suddenly pulling out their checkbooks:

• A relatively quick short sale can help a bank unload the property faster, leaving it in better shape than with foreclosure.
• Homeowners are growing sophisticated in fending off foreclosure while enjoying free rent. On average, it takes 631 days from the last mortgage payment to foreclosure, reported Lender Processing Services on Dec. 1.
• When lenders buy a mortgage at a discount from another bank, there's often room to pay an incentive, forgive debt and still reap a profit, Realtor Trent Chapman, who teaches brokers and attorneys how to negotiate short sales, told Bloomberg.
• Guy Cecala, publisher of Inside Mortgage Finance, told Bloomberg he wonders whether lenders are using incentives on properties with underlying title problems.

After all, as Bloomberg News points out (quoting RealtyTrac): "The U.S. housing market must digest more than 14 million distressed properties -- 1.5 million homes in the foreclosure process, 3.5 million with delinquent mortgages and at least 10 million 'underwater' properties, whose owners owe more than the homes are worth -- before the foreclosure crisis will subside."

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• Calculator:Should you rent or buy?
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• Calculator:Should I refinance?