Banks are offering delinquent homeowners $35,000 or more in cash to sell their properties for less than they owe - all in the name of clearing troubled mortgages off their books.
Bloomberg explains that this approach is actually financially beneficial for the banks now that the foreclosure process has become long, delayed, and riddled with taxes and fees. In the end, a quick "short sale" can actually save the banks about 15%.
"Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives," according to Bill Fricke, senior credit officer for Moody's Investors Service in New York.
Bloomberg shares the story of Karen Farley, who hadn't made a mortgage payment in a year when she received a letter from JPMorgan Chase in August. It said, "You could sell your home, owe nothing more on your mortgage and get $30,000."
Farley went ahead and sold her home $200,000 short of what she owed. The $30,000 covered her moving costs and rental deposits for a new home, and she received an additional $3,000 through a federal incentive program.
JPMorgan is giving the largest incentive payments and approves about 5,000 short sales a month. Not all the sales include incentives.
Short sales represented 9% of all US residential transactions in November (the last month for which data is available) and 33% of financially distressed transactions in the same month says CoreLogic, a real estate information company.
Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below.
Business Section: Investing Ideas
Banks claim short sales are good for their profit margins and bottom line. And institutions with clean balance sheets present an attractive offer for investors. So if short sales increase, the companies, along with some of the bigger names in finance could start to reap the benefits.
To explore that idea we created a screen on large cap financials companies that have recently gained some attraction from institutional buyers, like hedge funds. These companies often trade with millions of dollars at a time, and have access to more market research than the average investor, so it's easy to assume some smart minds are behind these purchases.
What do you think? Can short sales help boost the profit lines and the reputation of the financial industry? Do you think the "smart money" is right to invest in these names? (Click here to access free, interactive tools to analyze these ideas.)
1. Avalonbay Communities Inc. (NYSE: AVB): Engages in the development, redevelopment, acquisition, ownership, and operation of multifamily communities in the United States. Net institutional purchases in the current quarter at 5.5M shares, which represents about 5.83% of the company's float of 94.32M shares.
2. The Blackstone Group (NYSE: BX): Provides alternative asset management and financial advisory services worldwide. Net institutional purchases in the current quarter at 15.5M shares, which represents about 4.31% of the company's float of 359.77M shares.
3. Capital One Financial Corp. (NYSE: COF): Operates as the bank holding company for the Capital One Bank (USA), National Association and Capital One, National Association, which provide various financial products and services in the United States, Canada, and the United Kingdom. Net institutional purchases in the current quarter at 40.7M shares, which represents about 9.01% of the company's float of 451.76M shares.
4. Health Care REIT Inc. (NYSE: HCN): Engages in investment, development, and management of properties. Net institutional purchases in the current quarter at 8.0M shares, which represents about 4.5% of the company's float of 177.86M shares.
5. HCP, Inc. (NYSE: HCP): An independent hybrid real estate investment trust. Net institutional purchases in the current quarter at 23.0M shares, which represents about 5.68% of the company's float of 405.10M shares.
6. Public Storage (NYSE: PSA): Operates as a real estate investment trust (REIT). Net institutional purchases in the current quarter at 4.3M shares, which represents about 3.03% of the company's float of 142.09M shares.
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Disclosure: Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Institutional data sourced from Fidelity.
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