Proposed settlement would force banks to allow short sales for delinquent homeowners
The proposed deal among banks and government officials is aimed at stabilizing the real estate market and helping underwater borrowers who are months behind on mortgage payments avoid foreclosure.
By Jim Puzzanghera and Alejandro Lazo, Los Angeles Times
Reporting from Washington and Los Angeles—
Major banks may be forced to let severely delinquent homeowners sell their houses for less than the loan amounts owed as part of a broad settlement of federal and state investigations into botched foreclosure paperwork, according to government officials involved in the negotiations.
The requirement to allow so-called short sales would be in addition to forcing mortgage servicers to reduce the amount some homeowners owe on their loans, said two officials, who spoke on the condition of anonymity because negotiations are ongoing.
The goal of short sales would be twofold: provide a quicker and more economical way for banks to dispose of distressed real estate and to help stabilize the real estate market by clearing out a backlog of defaulted mortgages that are poised for foreclosure.
They would be used in situations in which borrowers were so underwater that the more costly and time-consuming process of foreclosure would seem to be the only option.
“Short sales just command a better premium than foreclosures,” said Glenn Kelman, chief executive for online brokerage Redfin. “It’s like day-old bagels. They never sell for the same price. If they sit there for a while, nobody wants them because houses just break down when they are left alone.”
Foreclosures continue to drive down housing values, with prices in 20 major U.S. cities down an average of 3.1% in January compared with the same month a year ago, according to new data from a Standard & Poor’s/Case-Shiller index. Prices in Los Angeles were down 1.8%.
The latest proposal is among those to be discussed when executives from the top five mortgage servicers meet Wednesday in Washington with state and federal officials working on a settlement that could range from $5 billion to $25 billion.
It will be the first face-to-face meeting since attorneys general from all 50 states, along with federal officials from the Justice Department and other agencies, presented the banks with 27 pages of demands calling for sweeping changes to mortgage servicing, including how homeowners are treated when they try to modify their loans.