In an effort to get rid of delinquent mortgages, some banks are offering as much as $35,000 as a bonus to homeowners that sell their properties under what they owe. The transaction, called a short sale is usually a last ditch effort, but now banks are finding these deals are faster and cheaper than foreclosures. The banks loss is about 15 percent lower than that on a foreclosure.
According to Guy Cecala, publisher of Inside Mortgage Finance, lenders are learning that several borrowers are willing to they wait for a loan modification even at the risk of repossession. In a loan modification, the monthly note is reduced to avoid repossession. Homeowners in foreclosure may go years without making payments before actually being forced out. “That’s why the banks have got to pay the big bucks,” Cecala said. “The real question is why is the bribe so big? Is that what it takes to get somebody out of their home?”
JPMorgan (NYSE:JPM) is handing out the largest incentives. The bank is approving about 5,000 short sales a month and usually offers between $10,000 and $35,000 in payments. Wells Fargo (NYSE:WFC) offers about $20,000 for relocation assistance. Bank of America Corp. (NYSE:BAC) is offering incentives of as much as $20,000. Currently, Citigroup (NYSE:C) offers $3,000 to borrowers who qualify for its program. Homeowners can also get incentives through the government program, Home Affordable Foreclosure Alternatives, as much as $3,000.
Sean O’Toole, chief executive officer of ForeclosureRadar.com, feels offering enough for the homeowner to get a rental apartment is reasonable but giving tens of thousands of dollars to delinquent homeowners sends the wrong message. “It may make sense for people to walk away, it doesn’t make sense for them to get rewarded for doing it,” O’Toole said. “It’s not the homeowner’s fault that house prices dropped so dramatically, but they have already received months of free rent, if not cash out.”
Last November short sales made up 9 percent of residential deals. State attorneys general began looking in to foreclosure practices in October 2010.
Here’s how these bank stocks are reacting to the news:
JPMorgan Chase & Co. (NYSE:JPM): JPM shares recently traded at $37.92, down $0.22, or 0.58%. They have traded in a 52-week range of $27.85 to $48.36. Volume today was 9,271,601 shares versus a 3-month average volume of 37,585,600 shares. The company’s trailing P/E is 8.47, while trailing earnings are $4.48 per share.
Wells Fargo & Company (NYSE:WFC): WFC shares recently traded at $30.38, up $0.18, or 0.6%. They have traded in a 52-week range of $22.58 to $34.25. Volume today was 11,365,844 shares versus a 3-month average volume of 32,334,400 shares. The company’s trailing P/E is 10.77, while trailing earnings are $2.82 per share.
Bank of America Corporation (NYSE:BAC): BAC shares recently traded at $7.93, down $0.04, or 0.5%. They have traded in a 52-week range of $4.92 to $14.95. Volume today was 130,540,254 shares versus a 3-month average volume of 270,354,000 shares. The company’s trailing P/E is 794.82, while trailing earnings are $0.01 per share.
Citigroup, Inc. (NYSE:C): C shares recently traded at $33.27, down $0.03, or 0.09%. They have traded in a 52-week range of $21.40 to $49.60. Volume today was 18,895,211 shares versus a 3-month average volume of 52,528,500 shares. The company’s trailing P/E is 9.01, while trailing earnings are $3.69 per share.
To contact the reporter on this story: at staff.writers@wallstcheatsheet.com
To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com
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