What’s missing from this story

Banks Paying Cash to Homeowners to Avoid Foreclosures (via eschaton)

Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.

Nowhere does anyone appear to mention the time value of money. As long as the real estate market is stagnant (or even falling) and the value of a house depends on things like maintenance and decorating, it makes enormous sense for a bank to take the money from a short sale now — and maybe even invest it in something that doesn’t go belly-up — rather than gamble that they will get a better price from a foreclosure sale a few years from now, or that the stones that are underwater householders will suddenly start bleeding green.

Say, for example, that the bank gets $200K out of a house now rather than the same $200K out of it in 18 months. That’s about $15K in profits that they could make (or $15K less interest they could pay whoever they’re borrowing from) even before the extra cost of the lawyers for foreclosure, the chance that the homeowner might walk away or even trash the place out, dropping the bank’s realized price substantially, or that the might fight the foreclosure and win because the bank doesn’t even properly hold the paper.

As long as the bank makes more money by getting a sale through now, it makes business sense for them to share that increment with the homeowner. So why haven’t banks been doing this all along? Some of them have — the article is reporting an increase in short sales from a quarter to a third of distressed transactions. But the answer, I think, is that the amount of money a bank is willing to offer a homeowner depends crucially on the power imbalances among the parties to the transaction. In previous years, at least according to reports, the power was mostly in the hands of mortgage-servicing companies, which made much more money by stringing out a loan and stringing out foreclosure. But servicers aren’t doing so hot, what with the criminal and civil liability for all those missing and falsified documents, so now the issue may be much more directly between the homeowner and the holder of the note.

Another possibility is that the economy is looking up enough that banks would like to have extra cash or borrowing capacity available on their balance sheets. That would be nice. But then again the bankers might be anticipating that prices will plummet further, and hoping to get out while they can…


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