Last year, mortgage lenders completed more short sales transactions than foreclosures--by a three-to-one margin. Foreclosed homes accounted for about 11% of all home sales in 2012, compared to 13 % in 2011. The volume of short sales increased by 5% and made up 32% of home sales deals.
Many homeowners have been unable to qualify for a mortgage refinance and take advantage of the historic low mortgage interest rates. Some of these people elect to enter short sales transactions to get from under the financial burden of costly underwater mortgages.
A short sale means the homeowner sells the home at a price that is less than the amount of the outstanding loan owed to the bank. The mortgage lender must agree to the short sale transaction. To qualify, homeowners must demonstrate a financial hardship. The bank forgives the borrower the amount of the difference between the unpaid loan and the short sale proceeds.
Bank saves money
Mortgage lenders began to approve more short sales after a record number 4.5 million foreclosures. The build-up in home inventory and a huge increase in the number of homeowners 90 days or more delinquent with their mortgage payments also motivated bankers to accept short sale offers..
Many bank figured out that this option cost less than foreclosure. Lenders benefit in two ways: 1) save money on maintenance property damage and foreclosure costs and 2) rid institutions of nonperforming assets on their books.
In addition, the National Mortgage Settlement--the $26 billion agreement reached between the five largest banks and government negotiators in February 2012--required lenders to approve more short sales for homeowners in financial trouble.
Since that time, lenders have directed $19 billion has gone toward forgiving debts for short sale transactions, according to a report released by the Office of Mortgage Settlement Oversight.
Short sales help market recovery
The increase in short sales has played a major role helping to create a floor for home prices, which fell an average of 35%, from 2007 to 2012, across the country. Compared to short sales, foreclosures have more of a negative impact on home values and the housing market.
Case in point, RealtyTrac reports that in the fourth quarter of 2012, foreclosure properties sold at prices an average of 39% below the market value of similar homes. In comparison, short sales, sold for an average of 23% below market prices.
As the inventory of foreclosures, and existing homes for sell have decreased, home prices have appreciated and help the housing market recovery. Based on the latest National Association of Realtors report, existing homes sales remains stable. The median home price increased to $174,100—a 12% increase on a year-over-year basis.
Building home equity and refinancing
One of the biggest obstacles for many people had been the amount of home equity. After the plunge in real estate values, by Q4 of 2011, the amount of home equity held by American homeowners dropped to the lowest point since the indicator has been tracked--$6.45 trillion.
During the first nine months of 2012, homeowners regained $1.3 trillion after home prices increased an average of 20%. As the residential real estate market continues to stabilize, and home prices to climb, more homeowners have regained the home equity and can take advantage of low mortgage interest rates.