The Immoral Short Sale
University of Arizona Professor Brent White is causing quite a buzz with his defense of the individual who is walking away from a mortgage. To summarize: corporations are expected to walk away from bad debt obligations but individual home owners are made out to be a moral disgrace if they do the same thing.
I agree with the professor and will take it a step further and say that a foreclosure is the moral thing to do as opposed to a short sale- which is being tauted as the only thing that will save the housing market.
I think one thing should be stated right up front- both situations have the very same origination: a homeowner is not going to live up to the mortgage obligation that they originated with a lender. So if that is the sin that makes a foreclosure "immoral," then both situations include it.
A foreclosure is straight forward- the owner defaults and the lender takes back the property. The property is returned to the market place and sold to another owner. There is no ambiguity on behalf of either original party or the next owner.
With a short sale, the borrower composes a hardship letter, the lender decides if it is hardship enough, a random price is placed on the property and, in general, the property is not subjected to market forces. The original borrower and the new buyer spend an undetermined period of time waiting to see if the lender is going to approve the transaction and the real estate professionals wonder if they are going to get paid what was promised.
The most "immoral" part of the short sale is that it is prolonging the recovery of the real estate market and the overall economy in general. However, it is being advocated by real estate brokers, real estate lawyers and real estate escrow companies. Why are these parties such strong advocates? Their own financial requirements. Brokers would rather have 400 agents seeking short sale listings than 5 agents being assigned foreclosure listings. Short sales are legal hotbeds and create millions of dollars in billing fees. Title companies that are not associated with a lender account can conduct normal business with agents and try to get their escrows- which they cannot do with REO properties because they are already assigned.
Short sales are a curse on the real estate market right now. They are a dull rusty butter knife trying to cut a loaf of bread. As bad as it sounds, a foreclosure is a clean serrated knife. The bread has to be cut to be eaten and the serrated knife is a much better tool to do the work. The real estate market is the loaf of bread that will feed our economy and foreclosures are the best method to do the cutting.
I agree with the professor and will take it a step further and say that a foreclosure is the moral thing to do as opposed to a short sale- which is being tauted as the only thing that will save the housing market.
I think one thing should be stated right up front- both situations have the very same origination: a homeowner is not going to live up to the mortgage obligation that they originated with a lender. So if that is the sin that makes a foreclosure "immoral," then both situations include it.
A foreclosure is straight forward- the owner defaults and the lender takes back the property. The property is returned to the market place and sold to another owner. There is no ambiguity on behalf of either original party or the next owner.
With a short sale, the borrower composes a hardship letter, the lender decides if it is hardship enough, a random price is placed on the property and, in general, the property is not subjected to market forces. The original borrower and the new buyer spend an undetermined period of time waiting to see if the lender is going to approve the transaction and the real estate professionals wonder if they are going to get paid what was promised.
The most "immoral" part of the short sale is that it is prolonging the recovery of the real estate market and the overall economy in general. However, it is being advocated by real estate brokers, real estate lawyers and real estate escrow companies. Why are these parties such strong advocates? Their own financial requirements. Brokers would rather have 400 agents seeking short sale listings than 5 agents being assigned foreclosure listings. Short sales are legal hotbeds and create millions of dollars in billing fees. Title companies that are not associated with a lender account can conduct normal business with agents and try to get their escrows- which they cannot do with REO properties because they are already assigned.
Short sales are a curse on the real estate market right now. They are a dull rusty butter knife trying to cut a loaf of bread. As bad as it sounds, a foreclosure is a clean serrated knife. The bread has to be cut to be eaten and the serrated knife is a much better tool to do the work. The real estate market is the loaf of bread that will feed our economy and foreclosures are the best method to do the cutting.
posted by Terry Schonert at 11:39 AM
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