Why the bailout bill will help your short sale...or will it?

Banks are now under pressure to work out deals with borrowers. The bailout bill is supposed to help free up the credit markets...whether or not that happens remains to be seen. The bill allows the Feds to buy distressed assets from banks and investors. What does this do to help someone facing foreclosure? Sadly, not much right now. It might mean help for others in the future. But this will take time to work itself through the markets. Also, the government will not be buying every asset, just the ones with the highest priority (i.e. troubled institutions that are in deep...) however, they have the pressure on mortgage companies to work out deals with borrowers.

Whether it's selling the home for less than owed (short sale) or restructuring the terms of the loan to suit the borrower's true financial situation (loan modification) lenders are more willing to work out a plan than they were 2 years ago. The Feds can not bail out every bank and banks need cash to loan money to other borrowers who will make monthly payments that will cash flow. Banks need this cash flow to generate revenue and pay for expenses. They have injections coming from this bailout but the reality is they need to move bad loans into a cash position (sell it off) and re-loan it to create revenue. A short sale that didn't have a shot a couple years ago may actually get approved now!

Think about this situation on a smaller scale. Let's say you own a business and times are tough (this may not be far off in this market!)...but for example, you are used to x-dollars coming in and y-dollars going out. You own a number of assets and equipment free and clear, and even have assets that are making money but some that are not. Then rough times hit, the dollars coming in have slowed considerably, but expenses are the same or worse...what do you do? You would probably sell off some of the assets (equipment, lay off employees, cut production, etc...) in order to increase your cash flow. This is exactly what is going on in the financial markets, banks are going to have to sell off assets. With or without the government, bad loans need to be moved off the books and turned into cash.

Posted Monday Oct 13

( 10/14/08 09:09AM ) — Adriana West

As a Short Sale Specialist in Georgia, I hope that this works out to be good for those in need of a Short Sale transaction. It might work out as you say, and it is a bit to early to tell. But here are some alternative things that might happen as well. With the Government owning the extreme-subprime mortgages, they will be rather unwilling to foreclose. What politician wants to put a sympathetic homeowner out on the street over Thankgiving and Christmas? And that kind of thinking is what is likely to rule the way the purchased mortgages are handled - political benefit.

That means that the homeowner will get to stay in their home longer, and continue not paying their mortgage. The bank has no need to negotiate with them to convert to cash via a short sale anymore, they got their cash already from US. So these bad loans stay in the government portfolio. Now Paulson and company will work to renegotaite the loan to something the borrower actually can afford, establish a payment history, and sell it back on the market in a couple of years. Great for these folks.

The less "toxic" loans are still out there on the market. The lenders still want to get rid of them. The market is just as bad as before (for now). And on top of all that, they have the experience of the last year that says "get out if you get anywhere near a decent offer". Which is the approach they've been taking (with some glaring and DUMB exceptions) in the last few months. This has led to my 85% closure rate on Short Sales in Georgia.

This means that much of the pressure is off the Lender, so they are not going to accept 40-60 cent on the dollar offers. But they still know they are in trouble and getting rid of the loan is better than not doing so. Meaning they should accept most offers over their pain threshold.

In short, I think this means we've seen the bottom in the Short Sale market for investors, but it is a fantastic time for owner-occupied purchases in Short Sales.

( 10/14/08 04:53PM ) — Jason Grams

Adriana -

I totally agree. Low ball offers will have little chance going forward, but owner-occupants can still get a decent deal if they are working with the right agent.