A healthy housing market is at the center of a robust economy, so the dribs and drabs of good news regarding the housing sector have been especially welcome. Last week, an especially tasty morsel was reported by real estate data company Realty Trac: Foreclosure filings for April represented the lowest since 2007, falling 14% from a year previous. In addition, the Mortgage Bankers Association noted that delinquencies decreased in the first quarter as well, hitting the lowest mark in more than three years.

This is good news, indeed. Looking a little deeper uncovers some of the reasons for these improved numbers -- one being that banks are disposing of troubled properties using an alternative to foreclosure called the short sale.

Banks discover the utility of short sales
Banks have stepped up the use of short sales over the past year, partly because of incentives from Freddie Mac, but mostly because of the increased efficiency and cost savings. Foreclosure proceedings are long and grueling and can cost banks upwards of $60,000 for each property it processes. Although short sales can complicate sales by requiring the bank, borrower, and buyer to come to an agreement on price, banks are finding that accepting less than the homeowner owes is preferable to foreclosure. They like the method so much, in fact, that some of the largest banks are offering incentives to troubled mortgage holders to enlist their participation.


Bank of America (NYS: BAC) , whose exposure to bad loans intensified when it acquired Countrywide Financial in 2008, began offering incentives last year of up to $30,000 in relocation expenses to homeowners who qualified and signed on for the program. JPMorgan Chase (NYS: JPM) also started offering borrowers amounts as high as $35,000 last year, acknowledging that short sales are a quicker solution than the foreclosure process. Wells Fargo (NYS: WFC) jumped in last year as well, though its incentives are lower than what the other two banks offer -- between $3,000 and $20,000.

Banks that signed the $25 billion foreclosure settlement earlier this year will also be offering select customers principal reductions as part of the agreement. Bank of America recently sent its first batch of letters out to eligible borrowers, and fellow signatories JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial are expected to follow suit. This should help keep hundreds of thousands of underwater loans from entering the foreclosure pipeline as well.

Fool's take
Short sales and other programs are helping to lower foreclosure numbers, which can only help the housing recovery. They have the added benefit of being less destructive to the borrower's credit, which might help turn at least some of them into buyers of more affordable homes more quickly than if they had been foreclosed upon.

Short sales are also on track to become shorter. New regulations are coming soon from Fannie Mae and Freddie Mac, requiring banks to decide on terms within 30 days. Halting steps, perhaps, but forward motion, at a quickened pace, is just what the housing market needs right now.

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At the time this article was published Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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