There is an interesting practice developing at our nation’s big banks. Borrowers who are in or nearing foreclosure are being offered thousands of dollars to short sale their homes. Some are even being offered $35,000 to get rid of their homes, and quickly. This situation presents an intriguing insight into the way banks are thinking at the moment. Banks would rather pay you and take a loss rather than foreclose on homes.
Do such offers signify that banks have learned their lesson and are trying to get out of sub-prime loans, or are they looking to just prevent further losses? Perhaps the answer is that the banks are concerned about existing home prices. Bank of America’s chief economist, Mickey Levy, while speaking privately, spoke of the concern that the 1.8 million bad loans in the nation will drive down the market if they go into foreclosure. Such fears help explain why the banks are desperate to avoid foreclosing on homes. They don’t want the rest of their loans to become vulnerable: the more foreclosures, the more house prices fall, therefore, the value of the banks’ loans go down and more people want to walk away from their homes, causing the banks even more losses.
In the end, this situation is a win-win. Not only do banks protect home prices, but they stand to get back more money quicker from a short sale than a foreclosure and the good publicity would be a nice change of pace for their PR departments. Homeowners in trouble are also helped because they can get out of their houses with some cash in their pockets and get on with the rest of their lives.