For years, the
housing market has been locked in a deep
freeze
, as a combination of underwater mortgages, reluctant lenders,
and a lack of political will have kept a huge mass of homes off
the market and in limbo. But as banks are finally coming to the
conclusion that it makes more sense to accept smaller losses now
to move forward, rather than clinging to the fading hope that
they'll somehow recover more in the future, housing could finally
get the catalyst it needs to recover.
Banks and short sales
Banks have had problem mortgages on their balance sheets for
years. But after
stubbornly hanging on to those trouble assets
, some banks are coming around and changing their tone when it
comes to so-called "short sales." In fact, not only are they
allowing such transactions to happen, they're also giving
homeowners some big incentives to do so.
Short sales occur when a prospective buyer makes an offer on a
home that isn't enough to pay off the seller's mortgage.
Especially in states like California, where the lender often
doesn't have recourse to hold the homeowner liable for any
shortfall, lenders have often resisted short sales. For a while,
that made sense, as banks figured that short-sale offers were
lowballing the true value of the home and that if they foreclosed
on the property, they could resell it at its higher market
price.
But lately, banks have realized that the
foreclosure process is long
, costly, and fraught with peril. With regulatory investigations
into foreclosure practices adding to the potential problems of
years-long delays and an obstacle course of legal requirements,
banks are concluding that it's better to accept the bird in hand
of a short sale than to hope for a recovery that may take years
to come.
Gimme some money
What's most surprising about this about-face is the length to
which some banks are going to get short sales done.
JPMorgan Chase
(
JPM
) reportedly offered one homeowner $30,000 to accept a short sale
on a $600,000 home, despite having a loan for nearly $200,000
more.
Real estate agents that Bloomberg interviewed said that the
company offers $10,000 to $35,000 for many (but not all) of the
5,000 short sales it approves in a typical month.
Wells Fargo
(
WFC
) and
Bank of America
(
BAC
) have made similar offers to certain homeowners, especially in
states like Florida, where foreclosure is especially onerous.
Is it the end of the bust?
What the housing market has needed all along is a
market-clearing event like this
. While refinancing and mortgage modifications only kicked the
can down the road, allowing actual purchases and sales to occur
is a step in the
right
direction.
A host of companies could benefit. Already, homebuilder stocks
have soared as news on the housing front has gotten progressively
better, and improving employment reports suggest that consumers
may finally be getting back on their feet.
But other possible winners include companies with land
development opportunities. For instance,
Howard Hughes Corp.
(
HHC
) owns master planned communities and other real-estate holdings
in 18 states, with key properties near Houston, Las Vegas, New
York, and Honolulu. Having the housing market flowing again would
open the door to further development. Similarly,
St. Joe Company
(
JOE
) could return to profitability if its extensive Florida land
holdings find themselves back in demand, which could happen once
the market starts perking up again.
Move forward
It's always a tough decision to cut your losses and admit that
you've made a mistake. Although it's taken too long, it's good
news that banks have finally figured out that throwing good money
after bad doesn't make any sense. With banks finally biting the
bullet and letting the housing market breathe again, a recovery
should come a lot faster than it otherwise would have.
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