Senator's Mortgage Trouble Highlights Positive Housing Trend
Utah Sen. Mike Lee recently sold his Alpine, Utah, home in a short sale, offloading the luxury residence for a price less than the amount of his mortgage, The Salt Lake Tribune recently reported. The transaction likely caused his lender, JPMorgan Chase, to swallow a loss, and, presumably, hammered his credit score.
The Republican lawmaker sold his his home for $720,000, close to $400,000 less than the $1.1 million that he paid for it in January 2008.
"It certainly is something that is painful to go through and I know a lot of people are going through it, and I feel for those who have had to go through it," Lee told The Salt Lake Tribune.
While Lee's case is a grim reminder of the housing meltdown's devastating impact on lenders and borrowers, it also calls attention to a positive trend in the housing market, highlighting the increasing popularity of a loss-mitigation tactic that lenders are turning to as an alternative to foreclosure.
Short Sales Gain Favor
Data shows that short sales, which are better for lenders and borrowers than foreclosures, have spiked recently, rising 33 percent year-over-year in January, the online foreclosure marketplace RealtyTrac reported this month. In Sen. Lee's state of Utah, they rose 70 percent, RealtyTrac vice president Daren Blomquist says.
The industry shift from foreclosures to short sales is moving at such a fast pace, "it's likely that sometime this year we'll actually see short sales outnumbering" sales of bank-owned properties, Blomquist says.
Experts say the increase is a symptom of negotiations between banks and the government over illegal foreclosures, which caused banks to put many foreclosures on hold, but that it also reflects banks' recognition that short sales are more effective at reining in losses when compared to foreclosures, which present a tangle of legal risks as well as lingering costs after repossession.
A short sale "allows a lender to avoid all that potential litigation that might come with a foreclosure, and in addition you see more and more city ordinances that fine lenders for not keeping up their foreclosure property properly," Blomquist says.
Industry Shift Poised to Accelerate
In addition, some relief programs, after much tweaking by the government, have finally reached a point where they are beginning to prompt lenders to approve more short sales, Blomquist says. The Home Affordable Foreclosure Alternatives program offers lenders thousands of dollars to approve a short sale, and up to $3,000 to homeowners who agree to one.
Among the requirements needed to qualify for HAFA, a homeowner must have a documented financial hardship, have a mortgage less than $729,750 and have obtained the mortgage on or before Jan. 1, 2009. Visit makinghomeaffordable.com to learn more about the program.
The rise in short sales only seems poised to accelerate: Twin mortgage guarantors Fannie Mae and Freddie Mac announced timelines in April that require servicers of their mortgages to respond to short sale inquiries from homeowners within a month or otherwise face penalties. And Bank of America recently said that it now intends to approve or reject short sales within 20 days, and offer up to $30,000 in relocation costs to homeowners who agree to them.
Both timelines, if adopted, would streamline a process that has been known to drag on for many months, often only to end in rejection.
Good News for Borrowers and the Housing Market
The market trend is good news for beleaguered homeowners: While a homeowner's credit score takes a significant hit, a short sale causes less damage to it than a foreclosure.
"In many ways this is the lesser of two evils," Blomquist says. "For homeowners, they are still losing the home. However, they're able to walk away, often with some type of monetary reward for agreeing to a short sale, and they also are just allowed to get a fresh start."
A movement toward short sales away from foreclosures also spells less stress for the housing market in general, Blomquist says. Homes that sell in short sales, unlike foreclosed homes, remain occupied, generally protecting them from dragging down nearby property values due to blight. What's more, they only sell for 21 percent less than non-distressed homes, on average, Blomquist says. For bank-owned homes, the discount is 34 percent.
Like many Americans who have suffered hardship from the housing crisis, Sen. Lee is reportedly now renting.
"It's not fun. It's not something any of us would have chosen," he told the The Salt Lake Tribune about going through a short sale. "But you do what you have to do when income doesn't match your outlays."
No doubt, going through the ordeal of a short sale is a challenging experience with lasting negative effects, as Lee observed. But like a growing number of other homeowners, Lee was able to steer clear of foreclosure. And for Lee and other homeowners -- and the housing market in general -- that points toward an improvement.
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