Banks Now Prefer Short Sales to Foreclosures : Windermere Real ...

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Banks Now Prefer Short Sales to Foreclosures

Banks dealing with lengthy, complicated and frequently messy
foreclosures are starting to see ?short sales? as a quicker and
cheaper way of getting bad loans off their books. The nation?s
biggest mortgage servicers- Bank of America, JPMorgan Chase and
Wells Fargo ? are beginning to step up their efforts to ease the
short sale process for borrowers who are unsuccessful in getting
loan modifications and face the threat of foreclosure. Servicers
are attempting to reach out to borrowers and are paying out more
incentives to those suffering financial hardship to help proceed
with a short sale. They are also cutting down the time taken to
approve short sales, although realtors still complain that the
process takes too long.

JPMorgan has processed 120,000 short sales through its
proprietary program since June 2009 and now averages 5,000 short
sales a month. The bank says its average response time to approve
a short sales transaction is 30 days. ?We think the short sale
is a good solution for many struggling homeowners and we let them
know that it?s an option,? said Christine Holevas, spokesperson
for JPMorgan in an email. ?Our outreach efforts have increased in
the past year or so. Foreclosure can be an expensive and lengthy
process for all parties. It?s a good deal for the homeowner and a
good deal for us (a cheaper way to get a bad loan off the
books.)?

The average time for the foreclosure process- from the time of
notice to the completed foreclosure- is now 318 days in the U.S.,
according to RealtyTrac. The foreclosure process in the state of
New York, which follows a judicial process, took 966 days on
average for properties foreclosed in the second quarter. New
Jersey and Florida followed with an average processing time of
944 days and 676 days respectively. The longer it takes for a
foreclosure to be approved, the longer bad loans stay on banks?
books. Foreclosures are also more expensive than short sales,
because of the legal expenses involved as well as the expenses
for maintenance and upkeep while the property is in foreclosure.

Wells Fargo, for instance, incurred expenses on repossessed homes
to the tune of $305 million in the second quarter and $408
million in the first quarter, according to data from SNL. Data
for the other big banks wasn?t available. According to real
estate analytics firm CoreLogic, the number of short sales in the
market have tripled in the last two years and transactions are
anticipated to grow by 25% in 2011. The markets with the largest
short sale volume are California, Arizona, Colorado and Florida.

Mortgage rates and the downgrade

At least one fear was not realized amid Monday?s meltdown: the
concern that mortgage rates would immediately shoot higher in
response to Standard & Poor?s downgrade of Fannie Mae and Freddie
Mac, the government-sponsored entities that are the 800-pound
gorillas of the mortgage market. In fact, the initial response to
Fannie and Freddie getting cut to AA+ from AAA was precisely the
opposite. Mortgage rates were poised to continue declining. HSH
Associates, which surveys lenders, quoted the average 30-year
fixed rate mortgage at 4.44% Monday. ?We expect to see rates go
into the 4.30?s by noon tomorrow,? said Keith Gumbinger, of HSH
Associates.

Mortgage rates are set off of the interest rates on U.S. Treasury
notes and bonds. Even though Standard & Poor?s pulled its AAA
rating of the United States Friday night, investors still rushed
into U.S. Treasury securities Monday as a safe haven, believing
more in the ?full faith and credit of the United States? than in
the opinion of Standard & Poor?s credit analysts. As investors
snapped up Treasury notes and bonds they pushed down interest
rates on those securities, which move inversely to prices.

Interest rates low till 2013

The Federal Reserve painted a much gloomier picture of the
economy yesterday, and indicated it would keep cash cheap and
easy for at least two more years. The Fed indicated it plans to
keep ?exceptionally low? interest rates in place until at least
mid-2013 as a way to continue to prop up the recovery. The new
two-year time horizon was an unusual move because the Fed doesn?t
typically signal its policies that far in advance, and because it
was interpreted as an admission that the economy will remain weak
until then. three of the Fed?s 10 voting members formally
dissented against using the new language. Multiple dissenting
votes are rare among the Fed?s policy-making committee. Regional
Fed presidents Richard Fisher of Dallas, Narayana Kocherlakota of
Minneapolis and Charles Plosser of Philadelphia said they would
have preferred to keep the ?extended period? phrase instead of
laying out the 2013 timeframe. ?What it?s telling us is, this
was a very divisive meeting and there was a lot of back and
forth,? said Sherry Cooper, chief economist with BMO Financial
Group and a former Fed economist.

Mortgage refis soar

Mortgage applications increased 21.7% from one week earlier,
according to data from the Mortgage Bankers Association?s
Weekly Mortgage Applications Survey for the week ending August 5,
2011. The Market Composite Index, a measure of mortgage loan
application volume, increased 21.7% on a seasonally adjusted
basis from one week earlier. On an unadjusted basis, the Index
increased 20.9% compared with the previous week. The Refinance
Index increased 30.4% from the previous week. The seasonally
adjusted Purchase Index decreased 0.9% from one week earlier. The
unadjusted Purchase Index decreased 1.2% compared with the
previous week and was 4.9% higher than the same week one year
ago. ?Amid substantial market turmoil last week, mortgage
rates dropped to their lowest levels of the year, and refinance
applications jumped more than 30% to their highest levels of the
year,? said Mike Fratantoni, MBA?s Vice President of Research
and Economics. ?Over the past month, refinance application
volume has increased by 63%. Refinance applications for jumbo
loans increased by almost 75% relative to last week. Despite
these low mortgage rates, applications for home purchase have
remained little changed through the summer.?

The four week moving average for the seasonally adjusted Market
Index is up 9.7%. The four week moving average remained unchanged
for the seasonally adjusted Purchase Index, while this average is
up 13.7% for the Refinance Index. The refinance share of
mortgage activity increased to 75.6% of total applications from
70.1% the previous week. The adjustable-rate mortgage (ARM) share
of activity decreased to 6.1% from 6.6% of total applications
from the previous week.

QE3 coming?

Goldman Sachs reviewed its position on further monetary stimulus,
saying that further quantitative easing had a greater than ever
chance of being implemented in the United States. ?We now see a
greater chance that the FOMC (Federal Open Market Committee) will
resume quantitative easing later this year or in early 2012.
We?ve changed our call because the committee?s reaction to
incoming economic data is more dovish than previously thought,?
Jan Hatzius, chief U.S. economist Goldman Sachs said in a note.
?The policy commitment to keep the funds rate at ?exceptionally
low levels?at least through mid-2013? was more aggressive than
we had anticipated. We are surprised that there is a date, even
more that it is almost two years in the future,? he said. He
added that the Fed had been explicit, more so than anticipated,
about preparing to use ?these tools? ? the same language used in
September 2010 which paved the way for the last round of
quantitative easing (QE).

?We see a recession risk of about one in three and if that were
to happen the committee would of course ease further. The most
likely route to be deployed initially by the Fed would be
?conventional? QE but it could be even more aggressive such as
rate caps or interventions in non-government securities market,?
Hatzius said. Although more QE was now Goldman?s base case there
was a possibility that it might not occur if the economy turned
out stronger than forecast and if inflation posed a higher hurdle
to further stimulus. ?Also the anti-Fed backlash late last year
might argue against further QE but the policy could be tweaked so
instead of a large-and-scary upfront number they might choose to
specify a smaller monthly flow of purchases,? he added.

WSJ ? Freddie?s losses narrow

Freddie Mac posted a $2.1 billion loss during the second quarter,
down from a year-ago loss of $4.7 billion. The mortgage-finance
giant paid $1.6 billion to the government and asked for $1.5
billion in new aid during the quarter. That marked the fourth
consecutive period in which, after making its regular dividend
payment to the government, the company didn?t generate a loss for
taxpayers. The report came on the same day that Standard &
Poor?s downgraded the long-term credit rating of Freddie Mac and
its larger cousin, Fannie Mae, to AA-plus from AAA. That stemmed
from S&P?s decision late Friday to cut the credit rating of the
U.S. government, which effectively nationalized Fannie and
Freddie three years ago.

The U.S. government has pledged to keep Fannie and Freddie afloat
by injecting unlimited amounts of money into both in order to
keep mortgage markets functioning. Fannie and Freddie are
required to pay a 10% dividend to the government on those
infusions. Over the past year, Freddie Mac has absorbed $2.1
billion in government aid to cover, in part, the cost of $6.4
billion in payments to the Treasury. The cost of the government?s
bailout of Freddie stands at $51.9 billion. Fannie Mae last week
reported a net loss of $2.9 billion for the second quarter and
asked the government for another $2.8 billion on Friday, bringing
its tab to $89 billion.

Freddie?s quarterly loss stemmed in part from losses on
derivatives that are used to hedge the firm?s exposure to swings
in interest rates. The firm also added $2.5 billion to its loss
reserves, up from a $2 billion addition in the first quarter.
While mortgage rates have fallen to new lows over the past two
weeks, Chief Executive Charles ?Ed? Haldeman Jr. warned that
?labor market weakness and households? worries about their
financial security? had damped home sales, prompting a ?cautious?
outlook. While both companies ran up huge losses in the two
years following the government takeover, Freddie has shown
glimmers of stability in recent quarters. That stems in part from
the size of its loan book, which is about 40% smaller than
Fannie?s, and because Freddie guaranteed fewer risky loans than
Fannie.

Steve Hill | Windermere Real Estate NW Fine Homes | Seattle Area Real Estate Homes For Sale | 206-769-9577

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