Many banks are now offering cash incentives to borrowers who are behind on their mortgage payments, encouraging them to sell their house in a short sale.
Banks including J.P. Morgan Chase, Wells Fargo and Bank of America are paying huge cash incentives, starting at $5,000 and higher, to the homeowners for doing a short sale.
Previously, a government program called HAFA (Home Affordable Foreclosure Alternative) incentivized homeowners by paying them $3000 for relocation assistance at the time of completion of the short sale of their house.
Foreclosure process is lengthy and very expensive. According to Francis Wissman of Moody's Investors Service, loss severities on properties liquidated through short sales have averaged approximately 15% lower than those on properties liquidated through REO sales. This simply means that the bank loses money either way, but they lose a lot less money when they do a short sale vs. a foreclosure.
Due to this, more and more banks are now inclined towards short sales. A research was done on approximately 200,000 properties in Southern CA to observe short sales and foreclosure trends. It was found that there has been a significant increase in completed short sales in the past 3 years, while a downward trend has been observed in completed foreclosures.
Also, the reason why more homeowners are opting for a short sale is because the effect of short sale on credit is not as negative as the effect of foreclosure or bankruptcy. With a short sale, the credit is negatively affected for 2-3 years. With foreclosure or bankruptcy, the negative effect stays for 7-10 years. This means that anyone may qualify for a new loan in 2-3 years after a short sale.