Banks Now Offering Delinquent Homeowners a Cash Bonus for Short Sales
In a move that has surprised many analysts, banks are now approaching select San Diego County homeowners with offers of cash for completing short sales on their properties. A short sale, where the lender accepts less than what the borrower owes on their mortgage, is often the only way many homeowners burdened with underwater mortgages can walk away from their debt obligations without being foreclosed. This relatively new practice of banks offering cash incentives for short sales has cropped up all over the country. The scheme mostly targets borrowers burdened with underwater mortgages as well as those who are behind on their mortgage payments, are jobless, or are facing some kind of financial difficulty.
Why are the likes of Chase, Bank of America and Wells Fargo offering homeowners lump-sum cash bonuses for completing short sales on their properties? No one knows for sure – the banks certainly aren’t divulging their motives. The selection criteria for homeowners eligible for this program are also unknown. There’s simply no way of knowing if you qualify for this scheme or not until you or the bank approaches you with an offer letter.
Statements made by bank officials indicate that the selection process for eligible homeowners and the amount of cash offered to them takes place on a case by case basis. Although they decline to give any hard numbers, officials at Chase state that the program is in full swing and they have started sending out letters to eligible homeowners all over San Diego County and neighboring areas. Along with Chase, both Bank of America and Wells Fargo have started offering cash incentives for completing short sales to homeowners who meet “certain borrower profiles.”
How the Program Works
A typical offer letter to a homeowner strikes up a conciliatory tone, offering hope and promising a “path to avoid the specter of foreclosure.” The real selling point in these letters is the offer of a cash bonus for selling their property. Obviously the letters are designed to grab the homeowner’s attention and notify them of their short sale options. Upon completion of the short sale the homeowner will be eligible for a hefty cash bonus that can be used for moving expenses and a fresh start, free from any debt obligations on their property.
The process starts when the homeowner and a real estate broker files a listing agreement and issues a letter authorizing the broker’s and bank’s negotiators to discuss the terms of the short sale. Since the broker, lender and borrower are all on the same page the short sale happens relatively quickly – about three months to complete. This is much quicker than a traditional short sale, which can take three to six months to close, with some cases lasting as long as a year. According to data from real estate tracking company RealtyTrac, completing a typical short sale takes between five and six months.
How much is the cash incentive?
Cash bonuses given to sellers at the end of a successful short sale vary widely, ranging from a few thousand Dollars to as much as $35,000. While the banks remain tight lipped about how they calculate the cash incentive amounts, the amount roughly corresponds to the value of the loans owed in the mortgage.
What’s in it for the banks?
The bank’s motivating factor for encouraging short sales is to cut down on their backlog of foreclosed properties. In a move known as loss mitigation the real estate world, banks and other lending institutions are proactively removing nonperforming loans from their balance sheets. The ultimate goal here is to prevent a delinquent borrower’s property from going into foreclosure. Foreclosure is a long and messy process taking an average of 318 days to process, according to the latest figures from RealtyTrac.
Properties subject to drawn-out foreclosures proceedings often decline in value due to a lack of maintenance and even deliberate vandalism. Such properties are expensive to fix and difficult to sell from the bank’s point of view. Selling off the property through an incentivized short-sale process reduces lengthy foreclosures, converts a potentially bad loan into a good one, and even gives the current homeowners an incentive to maintain their properties until they sell it.
What’s in it for the borrowers?
So we know this is good news for the banks, but why would a homeowner who has been approached with an incentivized short sale offer want to take part in it? For one, most of the homeowners who receive these incentive letters are behind on their mortgage payments and are facing other financial difficulties. The short sale incentive offered by the banks is, for many, an easy way out of their debt obligations.
Short sales also have less impact on credit scores than foreclosures; although the actual impact depends on how far being they are on their mortgage payments and some other factors. The banks also assure any homeowner who has received a short sale incentive letter will not be liable for deficiency judgments after they sell their homes.