Government To Subsidize Short Sales

Starting April 5, the government will begin offering a small benefit to both homeowners and lenders to engage in short sales instead of foreclosing on properties in default. The effect of this program may force properties to be sold at discounted prices, thereby continuing the downward spiral in property values. See the following post from Expected Returns.

From Obama's plan to ban foreclosures to the perpetual extension of "temporary" homebuyer tax-credits, I think it's safe to say government intervention in housing is getting ridiculous. In the latest example of government largesse at the expense of taxpayers, the government is proposing to dole out cash to all parties to incentivize short sales. From the New York Times, Short-Sale Program Will Pay Homeowners to Sell at Loss:

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

For the administration, there is also the concern that millions of foreclosures could
delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

What the government doesn't realize is that incentivized short sales will, ironically, bring down home prices. Essentially, short sales "lock in" lower home prices, pressuring surrounding home prices in the process. If the sole purpose of government intervention is to keep home prices elevated, then the government should take on a hands off approach, since banks are already doing such a great job of perpetuating the myth of stabilizing home prices.

What Benefits?

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

Should the incentives prove successful, the short sales program could have multiple
benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.

This doesn't make sense to me. Short sales by definition are more beneficial to servicing banks than foreclosures- that's the whole logic behind them. It's doubtful that $1,000 dollars will have much effect on banks' incentive to complete short sales on homes that are worth, on average, hundreds of thousands of dollars.

What will likely happen is that the government will be handing out money to multiple parties on short sales that would have occurred anyway, which is idiotic, but entirely in line with what I've come to expect from the government.

It's interesting that the government has essentially reversed its policy of forestalling foreclosures. It's pretty clear the government now realizes there won't be a rebound in home prices anytime soon. If the government thought home prices would recover, they would be doing everything to keep people in their homes so that the rise in home values would improve equity positions. A supposedly improving employment picture would further decrease the likelihood that homeowners would foreclose.

All of these projections are straight from fantasy land, and the government knows it, since they're the ones who manipulate government statistics. Read between the lines and realize that a housing recovery is not forthcoming.

This article has been republished from Moses Kim's blog, Expected Returns.