Federal Reserve Board Calls Short Sales as an Effective Alternative to Foreclosures

The Federal Reserve Board last Wednesday released a white paper entitled “The U.S. Housing Market: Current Conditions and Policy Considerations”.

The white paper calls short sales as an effective alternative to foreclosures.

There is no shortage of foreclosures in the U.S. housing market. Based on the report of Lender Processing Services, Inc., a leading provider of data and analytics to the mortgage and real estate industries, as of November last year, 6.26 million properties were 30 or more days delinquent or in foreclosure. The data and analytics provider added that 2.11 million properties were in the process of foreclosure as of November 2011.

While the Federal Reserve Board recognizes the fact that the problems plaguing the housing market are the reflection of the nation’s high unemployment and heightened uncertainty, the board said that the housing market problem is in itself caused by the housing market. In the particular, the board stressed that the housing market itself is plagued by a persistent excess supply of vacant homes, many of which came from foreclosures; and the costs of the foreclosure process that is imposed upon homeowners, lenders, and communities.

The Federal Reserve Board noted that further foreclosures can only bring the housing market down.

“Foreclosures inflict economic damage beyond the personal suffering and dislocation that accompany them. In particular, foreclosures can be a costly and inefficient way to resolve the inability of households to meet their mortgage payment obligations because they can result in “deadweight losses” or costs that do not benefit anyone, including the neglect and deterioration of properties that often sit vacant for months (or even years) and the associated negative effects on neighborhoods,” the board said.

As an alternative to foreclosures, the Federal Reserve Board recommends to both homeowners and lenders to opt for short sales. The board also calls on policymakers to consider supporting policies that facilitate short sales.

In the case of a short sale, a home is sold to a third-party buyer who offers less than the amount owed by the homeowner. This mode of sale is within the bounds of mortgage contracts.

“Short sales can be attractive because the property is transferred to a (presumably) new owner, keeping the property out of REO and reducing potential negative effects on communities from vacant properties,” Federal Reserve Board said.

Solving the foreclosures problem, the board says, is imperative to the restoration of the housing market health and essential part in the broader strategy for economic recovery.