(Reuters) – Five big U.S. banks accused of abusive mortgage practices have agreed to a $25 billion government settlement that may help roughly one million borrowers but is no magic bullet for the ailing housing market.

The record state-federal settlement will spread relief widely in the form of mortgage relief and $2,000 payments to borrowers who lost their homes to foreclosure.

It will also release the banks – Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup Inc and Ally Financial Inc – from civil government claims over faulty foreclosures and mishandling of requests for loan modifications.

But the banks still face a host of other potential government enforcement actions and investor lawsuits related to their packaging of home loans into securities, and other mortgage-related activities.

“The bottom line about this settlement, is it’s okay, it’s a step forward, it’s a step in the right direction. But let’s not kid ourselves, there’s a hell of a lot more that needs to be done,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

The housing settlement gives President Barack Obama, as he seeks re-election in November, a chance to show his administration is willing to get tough with big banks to help ordinary Americans survive the pain of the nation’s foreclosure crisis.

“We have reached a landmark settlement with the nation’s largest banks that will speed relief to the hardest hit homeowners in some of the most abusive practices of the mortgage industry and begin to turn the page on an era of recklessness that has left so much damage in its wake,” Obama said in a press conference on Thursday.

RELIEF BREAKDOWN

The deal with 49 states and federal agencies, including the U.S. Justice Department and the Department of Housing and Urban Development, is being billed as the largest federal-state settlement ever obtained.

It follows more than one year of negotiations after evidence emerged late in 2010 that banks robo-signed thousands of foreclosure documents without properly reviewing paperwork as the financial crisis produced a flood of foreclosures.

Home values have dropped 33 percent from their 2006 peak and nearly 11 million Americans now owe more than their homes are worth.

Under the deal, roughly 750,000 borrowers who lost their homes to foreclosure between 2008 and 2011 can expect to receive a $2,000 cash payment.

The banks would also provide $17 billion in principal reduction and loan modifications for delinquent borrowers who are facing foreclosure.

The deal would also include $3 billion to help borrowers who are current on their mortgage payments but unable to refinance because they owe more than their homes are worth.

Further, banks agreed to new servicing standards, including stricter oversight of foreclosure processing and a single-point-of-contact for borrowers.

The program is designed to last for three years, but includes incentives for banks to provide relief in the first year.

“The principal reduction helps stabilize the market a little bit, but not significantly,” said Brian Gardner, an analyst at Keefe, Bruyette & Woods Inc. “The monthly savings for those involved will be modest.”

BANK IMPACT

The deal does little to ease investor fears over banks’ mortgage liabilities, industry analysts said.

“We believe any initial euphoria over the deal will quickly fade as investors realize the flood of additional mortgage-related litigation that the major banks face,” said Guggenheim Partners analyst Jaret Seiberg in a note on Thursday.

The settlement resolves allegations of state and federal law including the use of robo-signed affidavits in foreclosure proceedings and deceptive practices in offering loan modifications.

It also covers claims the banks failed to offer alternatives before foreclosing on borrowers with federally insured mortgages, and filed improper documentation in federal bankruptcy court.

In another component of the settlement, Bank of America will pay $1 billion to resolve a separate investigation into “fraudulent and wrongful conduct” by the bank and the Countrywide Financial unit it acquired in 2008.

In addition, the Federal Reserve is imposing $766.5 million in penalties on the five banks as part of the settlement.

The agreement does not prevent the government from pursuing banks for wrongdoing related to the packaging of loans into securities, the target of a task force the Obama administration launched last month, and the subject of many investor lawsuits.

DISSIDENT STATES

The deal came together after negotiators were able to win support from a handful of states, including California and New York, that had criticized earlier terms of the proposed deal as too lenient toward the banks.

The lone holdout, Oklahoma Attorney General Scott Pruitt, declined to sign the settlement and said he was concerned the settlement “greatly overreached” the authority of the states and could be unfair to homeowners who continued to pay their mortgage.

He entered a separate $18.6 million deal with the five banks to receive his portion of funds from the settlement that go directly to the states.

California, one of the hardest-hit states in the foreclosure crisis, signed on after winning assurances of how much relief would go specifically to its homeowners.

What are the Advantages of a Short Sale?

1.) Less Damaging to Credit Rating: A Foreclosure will severely damage ones credit rating for 7 years, but a Short Sale is less damaging and its effect does not last as long.  Many times you can buy a house within 18 to 24 months of a short sale—even right away–in some instances.

2.) Major Banks are Encouraging Short Sales over Foreclosure: Part of the money from the recent $25 billion settlement between state-federal government and banks is set aside for short sales.  In fact, Bank of America is offering between $5,000 and $30,000 if you complete a short sale this year.

3.) Probable Relief from HELOC 2nd Mortgage: When the 1st Mortgage Bank forecloses, the 2nd TD HELOC loan is not deleted from your debt. The 2nd TD HELOC Mortgage Bank may take legal means to collect their debt after the Foreclosure. With a Short Sale, we negotiate with both lenders to highly reduce or totally eliminate the HELOC loan debt.  You can walk away with NO MONEY out of your pocket.

4.) Dignified Solution: With a Short Sale, we sell your home just like your neighbors have done. It’s a dignified resolution to a tough situation. On the other hand, after a Foreclosure, a Sheriff performs a lock out, the grass turns brown, and a Bank Sales Rep places ‘Bank Foreclosure For Sale’ signs in front of the property for your neighbors to see.

5.) Much Shorter Delay to Renewed Loan Worthiness: We have established an association with a National Credit Restoration firm. This firm has been able to make major improvements to the credit ratings of our past short sale clients, within months. But they have extreme difficulty in making improvements to damaged on credit reports resulting from Foreclosure.

6.) “Cash for Cooperation”: Some of the banks we work with are now offering home owners a Cash incentive in order to Cooperate with a short sale, versus allowing the property to be Foreclosed on by the Bank. Which Banks and amount of Cash offered, is on a case by case basis.  HAFA guidelines allow an immediate $3,000 for your relocation at the close of escrow.

Short Sale Agent Update Limited Time Offer

May 15, 2012

Short Sale Relocation Assistance Program:  Your clients could receive $2,500 to $30,000 in relocation assistance

Your financially distressed clients want to avoid foreclosure. You want to help them. So do we!

That’s why Bank of America is excited to announce that for a limited time, we are offering enhanced relocation assistance payments in which qualified homeowners who initiate a short sale without an offer could be eligible to receive $2,500 – $30,000* in relocation assistance and owe no more on their mortgage with the sale of their property.

Don’t miss this limited-time offer to get your distressed clients the help they need by initiating a preapproved price short sale today atagent.equator.com.

Determining your clients’ eligibility is easy:

Once you initiate the short sale at agent.equator.com we’ll evaluate the homeowner for this offer quickly to determine if they qualify for the enhanced relocation assistance.

The homeowner must participate in one of the preapproved price short sale programs, such as HAFA (Home Affordable Foreclosure Alternatives) or Bank of America’s proprietary program. Specific investor participation and eligibility criteria do apply to these programs.

Have an active preapproved price short sale? Don’t worry.

Bank of America is reviewing all current, in-process preapproved price short sale agreements to determine who is eligible for this limited-time offer.  Eligible homeowners actively participating in a preapproved price short sale program (such as HAFA or Bank of America’s proprietary program) will receive a letter if they qualify for the additional relocation assistance.  The relocation assistance will be paid at closing.

Frequently Asked Questions:

Q: How can I find out if my client qualifies for this limited time offer?

A: Call a Bank of America short sale specialist at 1.866.880.1232 Monday – Friday 8 a.m. – 10 p.m.; Saturday 9 a.m. – 5:30 p.m. Eastern.

 

Q: Do I have to do anything special when initiating or completing the short sale?

A: No. But act quickly by initiating the short sale at agent.equator.com.  This is a limited-time offer that your clients won’t want to miss out on.

 

Q: If a short sale is initiated with an offer, will it qualify for this relocation assistance?

A: No. This relocation assistance is only available on preapproved price short sale programs.  Short sales initiated at the time an offer is received do not qualify for the enhanced relocation assistance funds.

 

Q: Will the relocation assistance funds be reported on the HUD-1?

A: Yes, funds received at closing will be documented on the HUD-1, and a 1099-MISC will be issued.

 

Q: Can the relocation assistance funds be used to pay off existing liens?

A: Yes, the homeowner may use funds to pay off existing liens or to help with relocation expenses.

 

Q: Is the relocation assistance added to any other incentives, such as the HAFA or Bank of America proprietary program incentives?

A: The homeowner incentive will be inclusive of the $3,000 HAFA incentive.  For example, if the homeowner is eligible for a $5,000 homeowner incentive, $3,000 will be from the HAFA incentive, and $2,000 will be from the homeowner incentive.

 

Q: Is the enhanced relocation assistance available for other programs?

A: Currently, the enhanced relocation assistance is only available to short sale programs initiated without an offer. However, as we gauge the success we may extend this incentive to other programs.

Questions?

Homeowners and agents may call 1.866.880.1232 to speak to a Bank of America short sale specialist about this exciting limited-time preapproved price short sale program offering.

According to recent data by CoreLogic, a leading provider of information, analytics and business services, almost 1 in 4 homes with a mortgage are underwater.  This number has continued to grow quarter over quarter as real estate values continue to decline.

Many underwater homeowners allow their home to go into foreclosure or choose a short sale, where the home is sold for less than the principal balance, to eliminate the mortgage debt.  However, any amount of money that is written off as debt forgiveness can have taxable consequences.

Larry Holmes, CPA of Holmes and Associates, says that “If the bank writes down $100,000 in debt on a loan and you are in the 28% tax bracket, you could end up owing Uncle Sam $28,000 in taxes.  And you lose your house and credit too.  Ouch!”

The good news is that the 2007 Mortgage Debt Relief Act allowed up to $2 million in debt forgiveness for your principal residence.  Over the past five years, hundreds of thousands of families have taken advantage of this to sell their home and get a fresh start.  However, time is running out.  The 2007 Act expires at the end of 2012 and it is unclear whether or not it will be extended.

“If your house is underwater or close to underwater, you would be wise to sell your home this year,” says Mark Shandrow, Real Estate Broker for Shandrow Group.  “Hoping and praying that the market is going to go up and values are going to return is wishful thinking–at best,” continues Shandrow.  “With 1 in 4 homes underwater, there is no sign that the market will turn around soon.  All of these negative equity homes need to be removed from the market to see values increase.  And this could take many many years.”

Shandrow, who has helped hundreds of homeowners, says that short sales are getting a lot easier from years past but still can be very complicated.  “Some homeowners have multiple liens, past HOA dues and taxes, that can complicate the process.  Each additional element can lengthen the sales process.”  Timing is becoming even more critical with the looming expiration of the Mortgage debt relief act.

The good news is that there is a way out of your debt crisis.  If your house is worth less than what you owe on it, now is the time to do a short sale–don’t wait for a foreclosure.  FHA guidelines allow you to purchase another home within 3-years of a short sale and a whopping 7-years after a foreclosure.

The irony is you could probably short sell your house now and buy a similar home in three years for substantially less.

Call or email Mark Shandrow (mark@shandrowgroup.com or 562-364-9505 ext 100) for a free, no review of your mortgage situation.

According to HUD guidelines, borrowers are considered eligible for a new FHA-insured mortgage if:

• they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
• the proceeds from the short sale serve as payment in full.
• they did not purchase a similar or superior property within a reasonable commuting distance.

A short sale is when you sell your house for less than the debt you owe on it and the lender allows you.  If you are interested in learning more about this amazing program, call me today.

There’s no firm evidence that mass walkaways by underwater homeowners during the housing crisis ever happened. But maybe they should have.

Walkaways. Jingle mail. Strategic defaults.

Those of you already experiencing nostalgia for the cliffhanger days of the housing crisis will remember those terms. They were applied to homeowners who were supposedly so distressed at the collapse of the homes’ values that they were abandoning the properties to foreclosure, even though they still had the wherewithal to keep up their mortgage payments.

These borrowers were just “walking away” from their homes; “jingle mail” was a fanciful way of describing the sound made when they mailed their keys back to the bank; “strategic default” was the sober, nonjudgmental way of describing the phenomenon in financial journals.

The alarm was sounded mostly by banks and other lenders, who suggested that this outburst of moral turpitude by previously obedient homeowners threatened to make the housing crisis indescribably worse.

As the panicky talk of jingle mail picked up volume in May 2008, I wrote an article pointing out that there was no hard evidence that it was actually happening. Sure, millions of Americans entered foreclosure — but the notion that any of them did so even though they could afford to pay the mortgage was unproved.

Still, at the time home prices nationwide had only fallen by an average 15% from their peak, judging from the Standard & Poor’s Case-Shiller home price index, and still had a ways to go. The default rate on first mortgages was yet a year shy of its May 2009 peak, when it would reach nearly 6% across the board. (It’s now down to just over 2%.)

So it’s proper to look back at whether the threat of mass walkaways ever did materialize, as home values continued to plummet and defaults soared. The answer is: There’s still no firm evidence that it ever happened.

That’s not for want of searching. The shelf of mortgage market analyses groans under the weight of efforts to quantify walkaways. Federal Reserve Banks, academic researchers, investment analysts all have taken a crack at the topic.

But here’s the bottom line, from an academic study sponsored by the Mortgage Bankers Assn.: It’s easy to count the absolute number of defaults, but “whether or not those defaults are due to an inability to pay or an unwillingness to pay is typically unobservable from market data.”

“It’s always going to be fuzzy,” Michael J. Seiler of Virginia’s Old Dominion University, the study’s lead author, told me.

Researchers do know that default rates rise in tandem with the depth of negative equity. That could be evidence that people who are underwater are giving their homes back to the bank even though they could afford to pay the mortgage. Or it could mean merely that even distressed borrowers will try to hang on to their homes in the hope of recovering their equity, until the hopelessness of their situation finally overwhelms them.

Researchers have tried every which way to mark a line between the unable and the unwilling. The consulting firm Oliver Wyman and the credit bureau Experian, for example, jointly figure that if your mortgage is in default but your non-housing debts are all current, you’re a “strategic defaulter.” Their rationale is that traditionally people let everything else slide as long as they could keep their house, so if the trend is reversed, something else must be at work. By this measure, they say, strategic defaults peaked at the end of 2008 at 20% of all defaults.

That still involves a lot of guesswork. For one thing, a mortgage payment may be a homeowner’s biggest bill every month, so paying it may wipe out a debtor more thoroughly than taking care of a host of smaller bills. Plus once the foreclosure process starts, it can drag on for a year or more before the house is lost. A credit card issuer, however, can cut you off in a nanosecond.

But even presuming that many people could manage to stay in their house, that doesn’t mean they necessarily should. If there’s no prospect of recovering equity in a home for years or decades, the wisdom of keeping it at the expense of money better put toward college savings or retirement diminishes.

What often gets overlooked in the debate over walkaways is why it should matter. A default is a default, isn’t it? Seiler, for one, disagrees — he argues that defaults for noneconomic reasons have a uniquely corrosive effect on social behavior.

That’s based on the notion that borrowers have a moral obligation to pay their debts. Yet a mortgage contract is a legal document, not moral catechism. It doesn’t require you to make your payment regardless of your financial state; only that you recognize that if you don’t, you might lose your house.

Mortgage lenders customarily try to price the likelihood of delinquency or default into the loan; that’s why borrowers with the best credit scores typically pay the lowest interest rates. Nor is the credit score a gauge of moral purity — it’s an empirical reflection of the borrower’s debt load and bill-paying record.

No less a towering figure in American jurisprudence than Oliver Wendell Holmes Jr. wrote skeptically in 1897 of the inclination to invest contracts “with a mystic significance.” He explained that the duty of fulfilling a contract means “you must pay damages if you do not keep it — and nothing else.”

Nevertheless, as the recent housing crisis gained steam, bankers, government officials, financial columnists and others admonished homeowners that they had a sacred obligation to virtually bankrupt themselves so their mortgage lenders would remain whole.

In other words, strategic defaults were wicked, though strategic bankruptcies by corporations looking to shed such obligations as union contracts and pension commitments were apparently just fine. Here’s then-Treasury Secretary Henry M. Paulson in full harangue in 2008: “Any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property … is not honoring his obligations.”

Lest you mistake Paulson for an ordained minister with a diploma from a recognized divinity school, I’ll remind you that he’s a former chief executive of Goldman Sachs, which instead of eating its $14 billion in losses from the collapse of American International Group in 2008 mewled like a baby until the U.S. government — that is, you the taxpayer — covered those losses at 100 cents on the dollar. Paulson oversaw that bailout as Treasury secretary. If you need an ethics guru, look elsewhere.

The myth that a homeowner is morally bound to commit his wealth down to his cuff links to pay his mortgage chiefly benefits the mortgage industry. It distracts borrowers from looking objectively at their financial choices and rationalizes the lenders’ resistance to modifying mortgage terms to stave off foreclosure.

“It’s unfortunate how many people will squander their savings out of some misguided sense that it’s immoral to make a good financial decision,” says Brent T. White, a University of Arizona law professor who has written about the moral pressures on borrowers.

The vilification of strategic defaulters as walkaways or deadbeats has still not ebbed, although their numbers are still murky. What’s known is that default rates on underwater homes have consistently been lower than economists would have expected, and that only a small percentage of defaults have been walkaways by any definition.

All the industry blather about the sanctity of the mortgage payment may have had its effect, after all. Given the economic realities of recent years and the wisdom of rationally weighing one’s financial options, the problem may be not that too many people walked away from their devalued homes, but too few.

Remember, there are 6,000,000 owners currently IN default and another 11,000,000 who are underwater. (actual number of underwater owners could be as high as 20,000,000 if those who are considered ‘near’ underwater. Meaning, they owe what the house is worth. If they were to list their home for sale, factoring in the normal selling fees etc..they would be underwater)

We normally say that a company “went bankrupt,” implying that it had no choice. But when, recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad. Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.

American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.” It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.

WARNING: Short Sales…love em or hate em…they are here to stay! Go beyond the basic ‘expert’ short sale designation. Watch the FREE 2012 Agent Short Sale Secrets video and download the FREE Short Sale training guide.NOTICE: Free book guaranteed for the first 100 agents only

These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.

Part of the answer is practical. Defaulting (even in so-called non-recourse states) is still a lot of trouble, and to most people it’s scary. In addition, homeowners are slow to recognize how much the value of their homes has dropped, and have inflated expectations of how much it will rise in the future. The biggest hurdle, though, is social: while companies get called “very smart” for restructuring their contracts, there’s a real stigma attached to defaulting on your mortgage. According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”

Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense. Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.

When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms. They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting). And there are plenty of useful ideas out there for how banks could do this without taxpayer subsidies and without rewarding the irresponsible. For instance, Eric Posner and Luigi Zingales, of the University of Chicago, suggest that, in exchange for writing down mortgages in hard-hit areas, lenders would take an ownership stake in a house, getting a percentage of the capital gain when it was eventually sold. Lenders, though, have avoided such schemes and haven’t done mortgage modifications on any meaningful scale. It’s their right to act in their own interest, but it makes it awfully hard to take seriously complaints about homeowners’ lack of social responsibility.

Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead. ?

This is a first in a series of discussion about doing short sales for different services.  The purpose of these upcoming articles is to highlights some of the tips, tricks and secrets we have uncovered negotiating Bank of America short sales.  These tips and tricks should help with your experience and increase your chances of a successful short sale with Bank of America.

Click HERE to see if you Qualify for a Bank of America Short Sale

The biggest advantage of doing a short sale with Bank of America is that they utilize Equator.com for document management.  Equator.com is a web-based servicing platform that allows the agent, homeowner and servicer to track the progress of the short sale from an internet portal.   The listing agent can uploaded seller documents, such as tax returns, W-2s, etc., into the website without the risk of items getting lost.  Also, the servicer can negotiate offers and track the sales process and tasking system to make sure the transaction is on track.

Shandrow Group has completed numerous Bank of America short sales on Equator.com and has an almost 100% success rate negotiating short sales without deficiency judgements with Bank of America.

Click HERE to see if you Qualify for a Bank of America Short Sale

This is a great article on Huffington Post about why bank can not rent home to the previous home owner–it is currently prohibited by Fannie Mae or Freddie Mac–two of the largest investors in home mortgages.  Here is the full story. . .

Housing investors and advocates are embracing a new strategy to keep struggling borrowers in their homes: Purchasing houses from homeowners who can no longer afford to pay the mortgage, then leasing the property back to the previous owner at an affordable rent.

The strategy looks like a winner for both homeowners and banks. The homeowner gets to stay put and the stress of paying what has become an unaffordable mortgage disappears. Meanwhile, the lender doesn’t have to foreclose, which is costly and usually results in a vacant home they have to maintain until they can sell.

The problem is the strategy is prohibited. The nation’s major banks and mortgage companies, as well as housing giants Fannie Mae and Freddie Mac, typically bar the previous owners from remaining in their properties after homes are sold for less than the value of the outstanding mortgage — what is known as a short sale.

With nearly one in every five homeowners owing more on their home than it’s worth, and millions of homeowners on the verge of foreclosure, short sales are on the rise. Last year, there were 26,000 more short sales than in 2010, according to Hope Now.

At the same time short sales are increasing, there continues to be an oversupply of vacant homes, with nearly one in every ten houses sitting empty, according to the Census Bureau. The flood of vacant homes is hampering a rebound of the housing market, say economists, by keeping home prices low. It makes sense, then, to try to avoid bringing more empty homes onto the market.

But in fact, the banks refuse to allow these kinds of transactions unless the buyers sign legal documents promising they will not rent the property back to the previous owner. The restrictions are designed to limit fraud: If a struggling homeowner can sell the property for less than what they owe the bank and remain in the home, they could find a partner to buy the home at the reduced price, and together they could then sell the home and split any profits.

However, this seemingly sensible provision is now having an unintended effect, staunching what many experts portray as a promising way to bolster the troubled housing market: inviting investors to buy distressed homes en masse and then rent them out.

“All these government agencies, Fannie, Freddie, the Federal Housing Administration, they all have this policy,” said Jorge Newbery, director of American Homeowner Preservation, a company that buys homes and rents them back to the previous owner. “They have all this rhetoric about keeping families in their homes, but then it’s just pushed to the side. What they’re doing just seems punitive and illogical.”

The short sale policy is recent. Freddie Mac and Bank of America adopted it in summer 2010, with Citigroup following in early 2011. Wells Fargo and J.P. Morgan Chase declined to comment on the timing of their policies.

Investors say the policy is just bad business. “Short sales are a third of our market, and they’d sell faster if we could just rent them back to the previous owner,” said Steve Schmitz, chief executive officer of American Residential Properties, a firm that bought and then rented over 500 foreclosed properties in the Southwest. The firm is also nearing completion on a $100 million deal to acquire an additional 800 foreclosed properties.

According to Schmitz, the prohibition on short sales also makes impossible what could otherwise be a win-win transaction.

“The best deal for everyone is where we can lease it back to the previous owner,” he said. “The homeowner isn’t being kicked out. Their kids can stay in the same schools. For us, we don’t have to pay a leasing commission or have a vacant home. The bank wins because we’d be willing to pay more money for that house if we could lease it back to the previous owner. The community wins because there’s never a vacant home in the neighborhood.”

Ivy Zelman, chief executive officer at financial analysis firm Zelman and Associates, disagrees with the assertion that the restrictions impede short sales. “I don’t think it’s an issue for the single-family rental market, as investors rehab homes and have enough tenants to rent them to other than the former mortgage holders.”

Last month, the Federal Reserve Board released a 26-page paper that supports converting foreclosed properties to rental units. According to that report, now is an unusually good time for such a strategy because demand for owner-occupied homes remains low, demand for rental properties is rising, and the problem of banks’ continued hesitance to offer mortgages to everyday Americans means the situation won’t resolve anytime soon. The Federal Housing Finance Agency, which oversees Freddie Mac and Fannie Mae, is also currently reviewing proposals from potential buyers to convert the two companies’ foreclosed properties to rental units.

Though the Fed report and the FHFA program focused on already-foreclosed properties — as opposed to short sales, which function as an alternative to foreclosure — the same argument applies to both, said Newbery of the American Homeowner Preservation.

“If you have a borrower who can’t afford to own the home anymore, but can afford to rent it, and wants to rent it, why wouldn’t you let them?” Newbery said. “Why would you bring another vacant home on to this market if you didn’t have to?”

What do you think this sign tells us about the real estate ?