5 Reasons Why The Program Is Doomed To Fail:

Like the federal loan modification program that was put into effect just over a year ago, the federally subsidized short sale program, set to take effect April 5^th, is now being touted as the next great hope for homeowners who either can’t afford to, or are choosing not to, pay their mortgages.

But, just like the Making Home Affordable program that released last year with the promise of saving millions of homes, the federal short sale program is drastically flawed, and if enacted, will more than likely end up with the same exact outcome… after many months and billions of wasted taxpayer dollars, the “experts” will be that it isn’t working for a variety of reasons.

In this Nostradamus like post, we’re going to examine why this new program is doomed to fail… do us a favor – bookmark it, and in a year come back and revisit it, and see how many of these predictions come true. Without further adieu, here are 5 reasons why a federal short sale program won’t work:

1. Second (and third) mortgage holders

Here’s a potential scenario: You owe $500,000 on your home, which was purchased in 2005 with an 80/20 loan, meaning your first loan was for $400,000 (80%) and the second loan is for $100,000 (20%). Due to the collapse of the housing market, the home is now worth $300,000. You put it on the market for $300,000 and get an offer for $250,000, which you take to your first lender. Even if you jump through all their hoops, have a valid hardship, and get your short sale approved, that still leaves the second lender out in the cold, holding the bag to the tune of $100,000. The logical, and typical response from the second lender, will be to block the short sale any way they can.

2. Lack of buyers

Even in a perfect world where every lender agreed to take a loss and accept a short sale, there’s still one major flaw – we’re still in a recession, unemployment is at a multi-decade high and still rising, and consumer confidence is at an all time low. Add to that the fact that due to lack of liquidity and tightening of lending standards, many would be homebuyers are now ineligible for a mortgage anyway. Not exactly a formula for people rushing out to buy all these short sale properties, or to secure the funding to do so even if there were.

3. Bureaucracy & red tape by the banks

Have you ever tried to contact your bank for anything? Loan modification, find about or try to reverse a credit card fee, anything?

If so, you certainly know that it’s not the easiest task in the world. One department sends you over to another, who makes you repeat your info and your story. They tell you to fax in documents, then claim to never receive them. They say you’ll get a call back and you never do.

The point is that if the lender needs an excuse to postpone or make it  difficult for you to do anything, they have it… even if they have the best of intentions, the sheer volume of the requests for modifications, short sales, etc, has most lenders scrambling to play catch up.

Then there’s the fact that has squashed the hopes of so many short sellers in the past – even if you can get all the lenders and investors to agree on the short sale, that usually takes 3-6 months! By that time most qualified buyers have either found another home and lost interest in the current deal.

4. Lack of incentive & penalties

Just like the Federal Loan Modification program, this plan is lacking a huge ingredient… namely the lack of incentive for banks to take less than what they’re owed, and the lack of penalties for delaying or not complying with the rules of the program.

According to a NY Times article on Sunday, the program will offer $1000 apiece for 1^st and 2^nd mortgage holders, and $1500 for the seller.

Sure, there’s a $1,000 incentive payout for a bank to accept a short sale, that’s almost more of a slap in the face than anything. Actually, I’m kind of laughing out loud right now at the absurdity of this.  If someone owed you $100,000, and they came to you and said… “well I can only pay you $25,000, but  don’t worry, because my buddy here has another $1,000 for you…cool?” Haha… Does that really make anything better – it’s still only $26,000!!!

Or it looks more like this…

Borrower:  I know I owe you $100,000, but I can pay you $25,000… Is that ok?

Lender: No

Borrower: Ok, ok… well what if my friend uncle sam gives you $1,000 will that help?

Lender: Sure

I mean come on! Where do these smart people come up with these programs?

You really don’t need to incentivize the seller to sell – the fact that they are out of an underwater mortgage is incentive enough in most cases. The problem is, how can it possibly seem like a good idea for banks to take a $1000 consolation prize to take a loss of 5 or 6 figures on a deal?

Without a real, valuable incentive to accept short sale offers, and without a real penalty to lenders who don’t try to make things happen, there will be no real reason for lenders to go the extra mile to accept the short sales.

5. Lack of clear cut, uniform guidelines

Again, there is another huge comparison to be drawn with the federal loan modification program… the final decision is to be made at the sole discretion of the lender. One of the main reasons that the modification program failed is because you could submit the same application to 2 different lenders, or in some cases to 2 different people at the same lender, and receive 2 completely different answers.

Unless there is a uniform set of guidelines for acceptance, there is no way this will work.

Conclusion:

As with the loan modification program of a year ago, this program is destined for failure unless drastic changes are made to it by the government. By enacting these programs that are meant to be a show of the governments dedication to fixing the economy, but not including any real rules for banks to follow, they are delaying the inevitable, costing taxpayers billions more dollars, and making themselves look foolish and corrupt. Now is no time for token gestures, the economy is at the brink of collapse.

Either make changes that have some teeth and force the banks to start playing by some logical rules again, or do nothing, step back and let free market capitalism run its course. Let the market decide what the prices of homes should be, and who can qualify for them.

Sure there will be bank failures, foreclosures, and more pain, but most people who have an understanding of the economy, a few ounces of logic in their head, and don’t have a bank lobbyist at their doorstep daily, will tell you that this is bound to happen anyway. So isn’t it better to “rip the band aid off quickly”? Either let things take their course naturally, or to really take some action to change that course, instead of doing everything and anything, at all costs (literally) to keep playing by the bank’s rules, and stay on the same crash course that we’re currently on?

And then there’s the issue of the millions of people who are facing foreclosure. If they have tried everything possible to get a short sale done – jumped through all their banks hoops, found a buyer, did all the proper negotiation with all involved parties, and the banks still said no… then shouldn’t those people have the right to give the bank their home back with the same ramifications as if they did a short sale? It just seems very illogical to penalize a seller for circumstances that are far beyond their control, and very unproductive… why not penalize the banks who drag their feet and lose deals instead? You’d at least get some more short sales closed.

New York Times Reported on March 7, 2010:

But at the end of the day, the banks would rather make things difficult. According to J. K. Huey, a Wells Fargo vice president, said a short sale, like a loan modification, would have to meet the requirements of the investor who owns the loan.

“This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.”

Please comment below and let us know why you think this new program either will or won’t work. Thanks!

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