Nine banks have closed in 2012. The number was 92 in 2011 and 157 in 2010.
The closing of banks is a reminder that although things have been looking up lately, the housing market is still very clearly depressed. Prices could continue declining, there’s an oversupply of foreclosed homes, and many borrowers are still unable to qualify for loans.
Enter the economists.
Federal Reserve economists were behind the refinancing program comments in the State of the Union speech on January 24th, urging the White House take further action to ameliorate the housing crisis. Economists across the country have thrown out a few more ideas as well.
Many believe that investors could play a greater role in local recovery, citing mom-and-pop investors that have bought up excess housing stock and rented it out. Encouraging that trend would help clear the “shadow supply” of foreclosures, but financing remains an issue.
Increasing the number of loans that any one borrower can obtain from the GSEs is one suggestion, as is the elimination of capital-gains taxes on properties bought expressly as long-term investments with the intent to convert them to rentals.
It has also been proposed that the market would benefit from policy makers finalizing a clutch of pending regulations that would restore clarity to lending. Establishing greater certainty around lending rules might make banks more generous with credit and increase consumer confidence.
Another suggestion put forth by economists is that mortgage investors and banks reduce debt for the most troubled homeowners. It could be a risky move that might encourage more borrowers to default, but at this point negative equity is unlikely to cure itself. The idea here would be that borrowers would receive relief only if they stayed current on their loans, which would act as a check on a scenario of widespread defaulting.
Along those lines, in an effort to move troubled mortgages off their books, banks have begun offering more than $35,000 in cash to delinquent homeowners so that they can sell their properties for less than they owe. No lender likes short sales, but banks have decided that they’re both quicker and less expensive than foreclosing.
In addition to offering cash incentives, banks have been pre-approving details, streamlining the process of closing and forgoing their right to pursue unpaid debt in the hope of getting through some of the backlog.
At this point, more than 14 million homes are in foreclosure, and the pending repossessions that have accumulated are standing in the way of the housing market’s recovery and economic improvement. Often borrowers opt for load modification, which reduces the monthly payment and principal such that they can avoid foreclosure but as we know sometimes homeowners facing foreclosures are able to live rent-free for years before the home is actually foreclosed.
Banks, then, have to offer a substantial cash benefit to sell short, and $35,000-plus appears to be the going rate to get someone out of their home. A number of banks in Arizona, California, Florida, New York and Washington are now offering cash incentives. The largest incentives are extended by JPMorgan Chase, who approve about 5000 short sales monthly, many of whom have include settlements of $10,000-$35,000 each.
On average, short sale transactions, from listing to sale, take from 123 days – much less time than a foreclosure.