The decision of Bank of America, one of the nation’s largest mortgage banks, to add a liability clause to its short-sale contract could push more foreclose homes for sale into the market.
BofA expanded its short-sale contract and added a clause that would make homeowners liable for the difference between the short-sale price and the mortgage loan amount.
Housing advocates were dismayed by the clause, contending that the clause will push more homeowners into bankruptcy or foreclosure, perpetuating the growth of foreclosed homes for sale.
Since BofA is among the nation’s biggest mortgage lenders and also the owner of another of the nation’s biggest lenders, Countrywide Financial, its decision to revise its short-sale agreement will affect large numbers of borrowers.
This decision could force homeowners considering the short-sale option to change their minds and just allow their houses to become foreclosed homes for sale.
In response to criticisms, BofA explained that it was just asking homeowners to sign a promissory note to protect its shareholders and investors who will suffer large losses from the gaps between short sale prices and loan amounts.
The bank also insisted that other mortgage insurance firms and investors have been requiring the promissory-note part of the short-sale agreement.
Recently, the Obama administration encouraged troubled homeowners to consider short selling to prevent their houses from becoming foreclosed homes for sale if they are not qualified under the loan refinancing and modification schemes of the Making Home Affordable program.
Officials promoted the short-sale option because it protects the credit records of defaulting homeowners, giving them another chance to make a home purchase when their financial circumstances become better.
But the liability to pay the difference, as described in the Bank of America short sale contract, is now another barrier to overcome for many homeowners.
In the state of Washington, short selling has been a favored foreclosure prevention option. Of the total single-family houses sold in Washington recently, 4,400 units were short sales, representing around 12 percent of total statewide sales.
The short-sale number could be even bigger, according to real estate analysts in the state, because some short-sales were not listed as such in some records.
The BofA decision has alarmed mortgage professionals in Washington who have been working out short sales. They said about one-third of sales they are currently working out are short sales.
Lastly, spokespersons for BofA and other mortgage banks argue that the short-sale clause could encourage many homeowners to exert more effort to get loan refinancing or loan modification to prevent their houses from becoming foreclosed homes for sale.
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