These days it is frustrating to figure out options to avoiding foreclosure. Many homeowners who call me to discuss short selling have similar questions: what are my options. Of course, there are options out there – like refinancing (HARP2 will be able to help some underwater borrowers starting in a few weeks – see previous blog) and short selling.
Lately you may have heard talk about banks selling underwater homes to third parties, allowing the sellers to remain in the home as tenants. This idea is not new, but it has been considered lately as one solution to preventing foreclosures. There are positive and negative elements to establishing a program of this nature.
The positive side: If you are a homeowner the ideal situation for you, if you are underwater and will no longer be able to pay your mortgage, would be to stay in your home. The government agrees, and it wants the banks to sell your home to an investor, keeping you in the property as a long term renter (you still have to qualify as a renter, of course, so no unemployment). Your payments would likely drop substantially, and although you would not longer “own” the home, you would be able to stay there. Sounds good, right?
The not-so-pretty fine print: The problem with the above scenario is twofold: first, we have to consider the effect it may have on the housing market. At what discount will all these homes be sold to the third party investors? It would have to be a big discount, to make sense from an investment perspective. This will devastate neighborhoods, bringing the comparable sold properties down even lower.
Allowing homeowners to stay in their homes as renters will make things even worse for housing, because what kind of message does it send? Hey, if you can’t afford your home, you can still live there and just rent it! I can see this becoming a problem, and some homeowners will undoubtedly try to take advantage of it, hurting local markets and neighborhoods even further.
A smarter solution to the housing nightmare is to make the banks approve short sales faster. Although it is so difficult for homeowners to have to short sale their homes, they have an opportunity to start over and get back on their feet, make smart decisions and be homeowners again in the future. I do think that turning the vacant bank-owned inventory into rentals could be a positive spin on things, but I DO NOT think the government should be in the business of renting homes, so for this option to work an investor would have to come in and buy the bank-owned property and rent it out. But of course, this brings us back to the issue of deteriorating prices.
Trying to figure out the best ways to help both distressed owners AND the housing market is tough. I say the banks should bless the short sales and make the process more streamlined, so at least we can get more inventory on and off the market quickly, and get people on their way to healing. What do you think?