There is a concept in professional negotiations called "Thinking Double." In common terms, it's what we would call "walking in somebody else's shoes," and basically it means that you should always try to see the situation from the other party's perspective to get a better vantage point over the situation, and to know how to best negotiate. In this post, I will briefly try to think double about the short sale solution to a default borrower, and try to see the situation from the bank perspective.
A few months back my friend and colleague Ray Mathoda posted a very insightful blog post which referenced a WSJ article that claimed that 492 is "the number of days since the average borrower in foreclosure last made a mortgage payment." Today, there is an article from CNN Money that claims:
Nationwide, it takes an average of 565 days to foreclose on borrowers in default from their first missed payments to the final auction. In New York, the average is 800 days and in Florida, where the "robo-signing" issue is particularly combative, it's 807.
So, let's try to see this from the bank perspective (and I use the term "bank" to mean servicer and investor, whose self interest should be aligned in this matter). This number means two years of not collecting payments, possibly paying vacancy insurance, all the while moving the file between various departments and paying to service it. This is a money loosing proposition if I have ever seen one!
Now, let's take a look at the alternative side - short sales, long and drawn out as they may seem, average 180 days list to close for our team. Tracking a few other top producing teams in the Phoenix Valley, this numbers seems to be consistent. Meaning, some are faster, some are slower - but 180 is a common average. So, going the short sale route reduces the number of days that a bank has to carry a non performing asset by 314%! Couple that with the fact that a short sale typically nets the bank more money (up to 30% more according to Mortgage Banker's Association), and you have a solution that is very hard to beat, when it comes to dollars and cents.
Much more can be said on this topic, but if there has ever been a motivation for the banks to improve their short sale solutions - this is IT. After all, the bank is not in business of offering rent free living and personal stimulus to distressed borrowers, but in business of maximizing profits and minimizing losses for their investors.
Quick note on reversing the vantage points once again, and looking at it from the distressed borrowers perspective. What is their incentive to do a short sale? First of all, not all foreclosures take a long time. As Murphy's Law dictates, in my experience those homeowners who are banking on a drawn out process, usually get their notice of default served right away, and their process moves fast. Those who hope to "get it over with" quickly, however, frequently get stuck in the quagmire of bank's process, and their foreclosure magically gets pushed out and out and out. So, making the process more predictable would certainly go a long way in tapping into the self interest of the distressed borrower.
One more point - if we look at what the government HAFA program is trying to accomplish - we are talking about even shorter and MORE predictable timelines! And there is the moving cost incentive to the distressed borrower ($3,000), and there is the financial incentive to the bank.
There IS a better way - we just need to truly want to implement it.