A few weeks back, I sat with many of you at the Bank of America short sale summit hosted by the bank’s Chief Executive of Short Sales and REO’s, Matt Vernon. The summit lasted about an hour. After, Mr. Vernon took various questions from Intero Realtors about the bank’s short sale process, I recall one Realtor asking, “What percentage of homes does Bank of America foreclose on?” To which Mr. Vernon replied, “I’m not allowed to answer that question.” It was clear then that Mr. Vernon and Bank of America did not want to tip their hand as to how little they foreclose in the current atmosphere. They feared that, if people thought foreclosure was not likely, the bank would have much less leverage in bargaining when it came to below market offers and payment demands. In fact, if people don’t think foreclosure is likely, they have little incentive to ever sell short.

Fast forward to last Friday, October 8^th. Amidst public pressure from politicians, the media, and fed up borrowers, Bank of America announced a “temporary” halt on all of its US foreclosures. Other lenders, like GMAC Mortgage, JP Morgan Chase, and PNC Financial, have enacted similar plans in California, Nevada, Arizona, New York, Florida, Illinois and other states. These “foreclosure halts” may last anywhere from a few weeks to a few months. This was welcome news for many distressed homeowners who have been struggling for the past 3 years to stay in their homes.

The Reason for the Foreclosure Halt
Recently, there have been lawsuits challenging various banks’ ownership of certain mortgages. Attorneys have started to argue that certain banks do not technically own the mortgage notes that justify their foreclosures. The argument is that the banks sold and resold each note, and eventually lost track of who actually, legally holds each note. This is not an injustice, mind you. Rather, it is a technicality. Some people facing foreclosure have argued that they owe money to someone, just not the bank actively trying to foreclose on them. This dilemma, coupled with a very few instances where homes were seized and then returned after it was discovered that no mortgage existed on the property, have lead some banks to halt all foreclosures as they revisit and verify their current processes.

As this happens, politicians in tough reelection fights, including Senate Majority Leader Harry Reid, have started to call for a nationwide “moratorium” on foreclosures. The President has thus far disagreed with these moratorium demands. Still, many banks are now imposing their own moratoriums to quell criticism and address their internal problems before there is a government mandate.

How will this affect the Real Estate Market?
While undoubtedly good for those families who are down on their luck and unable to make monthly mortgage payments, there is some question as to whether this action will be good for the slumping housing market. REO’s and Short Sales make up nearly 25% of all residential real estate transactions in the current market. In the San Francisco Bay Area, these transactions make up nearly 33% of the current market. Of course, without foreclosure the REO market disappears because banks will start to own fewer and fewer homes. And without the threat of foreclosure, there will be less incentive for sellers to agree to sell short because they can simply wait out the market in their home without making mortgage payments.

How will this affect Short Sales?
When it comes to short sales, the foreclosure halt probably means that short sale negotiators have greater leverage when negotiating offers with the banks. Essentially, if the bank is not going to foreclose, then the bank has much greater incentive to accept a low ball offer. Otherwise, the bank has no alternative for the mortgagee who cannot pay the mortgage.

However, the mortgagee now has less incentive to sell. The primary reason for short selling is to avoid foreclosure. So long as foreclosure is not going to happen, a mortgagee can theoretically stay put without resorting to a short sale.

So, for those sellers that truly face “insurmountable hardship,” this action by banks provides the best possible chance to drop a destructive asset. But, since that asset is a family’s home, many will probably forego resorting to a short sale during this time.

How will this affect REOs?
Every bank has a number of REOs on the books. However, as foreclosures slow, bank owned properties will start to dry up. As such, some predict an unexpected rise in REO prices as bargain buyers see less and less REOs on the market. However, others foresee a doomsday scenario. Past owners might challenge the “legality” of their past foreclosures, and agents will have to disclose pending legal action to buyers. In this case, REO listings become harder to obtain because there are less foreclosures, and they become harder to sell because no one wants to buy into a lawsuit.

How will this affect our Legal Liabilities as Realtors?
Many think this is a net positive for Realtors insofar as legal liability goes. Basically, Realtors get busted in short sale transactions because they act like lawyers and CPAs. If foreclosure is not possible, people might stop asking Realtors for advice about bankruptcy and people might not sign listing agreements simply as a last resort to stall foreclosure. Plaintiffs will be less able to bring reasonable claims that they were “forced” or “tricked” or “persuaded “into a short sale due to bad advice by their Realtor.

However, this is not necessarily true. What happens if a recently foreclosed REO was wrongly foreclosed by a bank without proper authority to exercise the note? What happens if a buyer makes an offer on an REO that has a lawsuit pending? What happens if the short sale went into contract, but now the seller wants to breach because foreclosure is temporarily off the table? Now more than ever, we must facilitate wanted transactions and disclose material facts. If your REO has a former owner that intends to file suit, disclose that to prospective buyers. If your short sale seller has changed his mind, let him. These strange times simply present new ways for Realtors to fall into the same dilemmas.

In conclusion, many banks have started to halt their foreclosures. Many other banks are expected to follow. This will probably have a short term negative effect on the market. However, it may also provide sellers their best opportunity to sell short as some banks will be more willing to accept low offers. However, not all banks have imposed foreclosure halts and there is no government moratorium. So, Realtors need to be careful when discussing options with clients. This is especially true since it may be unclear which bank actually holds the client’s mortgage note. Ultimately, as this market continues to change, our clients’ have new options and tough decisions. But our legal role as Realtors stays constant. We facilitate sales for our clients and we disclose material facts about the property – we do not make our clients’ decisions.