Short Sales Can Bring Long Problems
Tuesday, June 30, 2009SUSIE GHARIB: Another glimmer of improvement in the U.S. housing market. Home prices fell in April but the rate of decline is slowing according to the Case-Shiller home price index. Today's report showed prices in major U.S. cities fell by 18 percent from a year ago. Economists were expecting a slightly bigger drop. The nation's hardest hit areas: Phoenix and Las Vegas, where home prices have lost more than half their value since peaking in October. While home prices are falling, loan modifications are rising. The government says loan modifications were up 55 percent in the first three months of the year. But that number isn't as positive as you might think. That's because there's been a huge jump in mortgages becoming seriously delinquent, so more and more loans need to be changed. Working with lenders to modify a mortgage or do what's called a short sale is difficult these days. Stephanie Dhue introduces us to one borrower who learned just how tough a short sale is.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Heidi Burgess saw the handwriting on the wall and tried to be proactive. With home prices down and knowing her husband's military assignment would force a move, seven months ago she began working with their lender, then Indy-Mac, to lower their mortgage payment.
HEIDI BURGESS, HOMEOWNER: We were encouraged because Indy-Mac had been taken over by the Federal government, so our taxpayers owned this bank. And we thought, OK, maybe this was to our advantage. This is a Federal bank, bought out by Federal money, by taxpayers' money. And here we are, a military family, not asking for anything that isn't being done for anybody else.
DHUE: But the bank said no, because the Burgesses were current with their loan. So the couple decided on a short sale, where the bank agrees to take a loss. Two offers later, the house still hadn't sold, because the bank, now Onewest, insisted the Burgesses put up money.
BURGESS: So who's winning? The people don't get the house. We're stuck in a mortgage where we're forced to stop making our payments and the values keep dropping. So when the bank goes to sell it, if the bank were to sell it at foreclosure, once we leave, the house will deteriorate. We're not going to keep it up. We're not going to do the lawn and they'll get a whole lot less than what they're even being offered now.
DHUE: After we asked Onewest about the situation, the bank accepted a short sale that doesn't require the family to put up cash. The Burgess situation is typical of how challenging it is to complete a short sale these days. Banks say it's common to require cash from homeowners. Realtors complain banks are inconsistent because there are no standards and the transactions are complicated says Steve O'Conner of the Mortgage Bankers Association.
STEVE O'CONNOR, MORTGAGE BANKERS ASSOCIATION: It's important to remember that a lender has to do a certain amount of due diligence before they can execute a short sale. They have to see if there are other liens on the property. They have to get the approval of the other lien holders. They have to get the approval of the mortgage insurer if there's mortgage insurance. They have to determine the fair market value of the home and often times what's happening is the first time a lender hears of a proposed short sale is when the borrower contacts them and already has a contract.
DHUE: The Federal government is encouraging lenders to do loan modifications and short sales. So far the administration has put up more than $15 billion to help banks and borrowers restructure loans. About 50,000 loans have been modified under the program. Economist Mark Zandi says that's not enough to stabilize home prices.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: I had hoped that the president's modification plan would be kicking into a higher gear by now and that we would begin to see foreclosures peaking certainly by the end of this year. That looks now increasingly unlikely given that the modification efforts just aren't going at all well, so I do think prospects (INAUDIBLE) will continue to climb into next year.
DHUE: Zandi expects home prices to fall 40 percent from their peak. And once prices do stabilize he expects it will take a couple more years before they begin to appreciate. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
