Short sales: The answer to America's housing crisis?

To sidestep the painful and expensive foreclosure process, lenders begin offering delinquent borrowers cash to sell their homes for less than they owe

Banks are stepping up their efforts to get troubled mortgages off their books by offering delinquent homeowners cash incentives to sell their properties at a loss. Are these "short sales" a smart way to clear out the glut of houses in danger of foreclosure and start a housing industry rebound — or will they just depress prices further? Here's what you should know:

What exactly is a short sale?
A transaction in which a house sells for less than the amount the owner owes the bank. The bank agrees to let the homeowner off the hook, and considers the loan paid in full, even though it's not getting enough money to cover the principal remaining on the existing mortgage. 

SEE MORE: Obama's mortgage plan: Who really benefits?

Why would either side want a short sale?
The seller gets out of a loan that he or she couldn't afford to pay back. And banks win too, because their losses on short sales are about 15 percent less than on foreclosures. In some ways, that's because short sales are quicker. Last year, the average short sale took 123 days from listing to closing on a new sale, while foreclosure paperwork typically took 348 days, followed by 175 days to sell the home.

Can banks afford short sales?
They're starting to realize that they can. Short sales accounted for 9 percent of all home sales in November 2011, up from 2 percent in January 2008, as the crash began. In the typical foreclosure process, struggling homeowners can end up essentially living rent-free for years before banks jump through the legal hoops necessary to force them out. Besides, Realtor Trent Chapman tells Bloomberg, many lenders have purchased troubled mortgages from other banks at a discount, so they can forgive a chunk of outstanding debt, offer cash as bait, and still wind up making a profit.

So banks are actively encouraging short sales?
Yep. Banks are offering delinquent homeowners as much as $35,000 — and giving up the right to go after unpaid debt — to get them to sell at a loss and move on. And the federal Home Affordable Foreclosure Alternatives program offers homeowners another $3,000 to go through with a short sale. 

Is this really a win-win?
In a way. Banks are betting that clearing out the glut of looming foreclosures won't just improve their balance sheets, says Ben Walsh at Business Insider, but speed up a "broader and sustained economic recovery." But what will it do to the housing market in the near term? "As such deals continue," says Felix Salmon at Reuters, "and the homes then get dumped onto the market at any price, they will only serve to further depress the U.S. housing market," and "act as an incentive for homeowners to stop paying their mortgage and start holding out for a big check in return for leaving their homes quietly. The whole thing is an unholy and unnecessary mess."

Sources: Bloomberg, Business Insider, Realtor.org, Reuters

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GLOBALIZATION IS NOT THE ANSWER

WASHINGTON -- As the World Economic Forum at Davos, Switzerland, enters its 50th year, one can rather easily trace the manner in which "globalization" -- the idea that totally open and unencumbered trade among nations -- was expected to save the world. Endless sessions on the theme entered the economic and political parlance and seemed to the elites and to the free thinkers to be the world's salvation.

It used to be that globalization was an idea no person in his or her right mind would think of challenging. It was so good, so right; it was the moral answer to the globe's economic inequities. It opened the formerly closed markets and borders of the industrialized United States and Europe, and finally let the outsiders from the Third World "in" on the feast.

Before anyone knew it, globalization had taken over. American factories that had moved to the Mexican border now moved to China, or Thailand, or Indonesia. Japan went rapidly from being a war-torn sister nation to being one of the advanced economies. As this happened, the workers in the First World hardly gave it a secondhand notice -- until the steel mills in Chicago closed, and factories in Ohio were suddenly still, and American universities began training more and more Chinese students to "borrow" our technology, go home and become engineering marvels.

When someone would ask innocently at Davos, as someone did the year I attended the meeting, what would happen to the former workers of those now-empty factories, the answer was always, "They'll go into the service industries. The service industries will blossom in the new America."

Nobody ever asked how a steelworker, however brave and good at his job, would become a concierge in a hotel, or how an assembly-line worker without a high school education would become an interpreter at the United Nations. And that was the absurdity: Nobody ever asked how empty factories could possibly serve America. Or how moving the jobs, technology and training that goes with them, and then the research and development, would not naturally make us poorer and them, richer.

So today the United States trails in manufacturing, and China whizzes by us with annual growth rates of 8 to 10 percent. But everything will be OK; we can keep borrowing money from Beijing.

A funny thing happened on the way to understanding what globalization did to us: The Davos participants finally sat down in the snow and gave us some cool assessments.

Former E.U. trade commissioner Peter Mandelson told one luncheon meeting that politicians need to persuade people that globalization and free trade were still good, even though they are now blamed for higher unemployment and stagnant wages in the West.

That same week, President Obama gave his State of the Union address, promising to bring manufacturing jobs and factories back home, which most economists see as impossible. He would even set up a "trade enforcement unit" to investigate unfair practices in China. Some new-thinking European leaders picked up on that theme and talked about "reindustrialization."

Some politician-thinkers even see the current Wall Street sickness as beginning with the West's loss of manufacturing to Asia. Mahathir Mohamad, the former prime minister of Malaysia from 1981 to 2003, wrote during Davos in the Financial Times: "Unable to compete, the Europeans and particularly the Americans opted for the financial markets. Inventing new financial products such as short selling of shares and currencies, subprime lending. ... But the finance market spins off no real businesses, created hardly any jobs and gave rise to no trade. Getting greedy, they abused the system, manipulating the market for greater profits."

Showing clearly the new American concern about globalization and what it has done to us, The New York Times has been running an excellent series, cleverly titled "The iEconomy, an Empire Built Abroad."

One article elaborated on how the U.S. lost out on producing the iPhone in America. Whereas only recently Apple boasted that its products were mostly made in America, today almost all of the 70 million iPhones, 30 million iPads and 59 million other products sold last year by Apple were manufactured overseas.

When President Obama asked the late Steve Jobs why that work can't come home, Jobs answered unambiguously, "Those jobs aren't coming back."

But perhaps even worse for the future of America than the loss of jobs is the fact that our own big companies and corporations -- the "babies" that Mother America fed with her natural resources and universities and scientists -- no longer feel any loyalty to her.

The Times quotes Betsey Stevenson, the chief economist at the Labor Department until recently: "Companies once felt an obligation to support American workers, even when it wasn't the best financial choice. That's disappeared. Profits and efficiency have trumped generosity."

Despite the fact that there is no immediate answer to the globalization problem for the industrialized nations, change IS happening. At least now, Americans realize the problem. They know where and why their jobs have gone. With President Obama, Americans are finally looking for answers, and this is something we're good at.

This is where change begins -- when one era ends, and is known to end, and a new one begins.

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