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Short Sales, Loan Mods Could Go Over Cliff

DEC 28, 2012 4:26pm ET

WE’RE HEARING it will be a big mistake if Congress fails to extend a tax provision that provides the grease for short sales and principal reductions on underwater loans.

One real estate expert sees property value declines of 3% to 5% in certain markets if the Mortgage Forgiveness Debt Relief Act is allowed to expire at the end of Monday (Dec. 31).

If it isn’t extended, more distressed borrowers will choose to go through foreclosure as opposed to a short sale, according to Travis Olsen, co-president of Loan Resolution Corp.

That will increase the flow of REO properties onto market, which sell at a discount compared to short sales. There is generally a 20% difference in loss severity between an REO and a short sale. Bad for the lender!

Currently, REO entering the market has slowed to about 55,000 a month, compared to 70,000 a year ago, according to CoreLogic.

And the REO that “dribbles out gets effectively absorbed,” according to CoreLogic chief economist Mark Fleming.
But there are also 36,000 to 38,000 short sales a month, according to the Hope Now servicer alliance. And a sharp reduction in short sales could be disruptive.

“Not renewing this bill would be a huge setback for the real estate market,” Olsen said. “I see no political gain by letting it expire.”  LRC is based in Scottsdale, Ariz.

At deadline for this column, President Obama was expected to meet Friday afternoon with congressional leaders to find some way to avoid the “fiscal cliff.” Right now there seems to be no movement toward extending the debt forgiveness tax provision.

“There are bigger dogs barking now,” a lobbyist said.

COMEDY AND COMPLIANCE: Here are two words rarely (if ever!) heard in the same sentence. But thanks to the folks at QuestSoft you can alternate a few laughs in between grinding your teeth at the new compliance burdens the industry is facing.

The California-based software company has put out, for the holiday season, all your favorite compliance Christmas carols. What? You didn’t know there were any? Well, how about “It’s the Most Stressful Time of the Year?” or “Hark, the Headaches HMDA Brings?” or “Do You Fear What I Fear?”

“A QuestSoft Compliance Christmas” features a dozen of these parody carols, expertly sung by the (real) Charles Dickens Carolers in impeccable period costumes. And for good measure, there’s also a Compliance Telethon thrown in (helping to save loan officers from the dreaded DFS, or Dodd-Frank Syndrome).

This is a high-value production and the parodies, most written by QuestSoft president Leonard Ryan, are spot on. Ryan should not quit his day job, but check out just a couple of lines from “Carol of the Acronyms.” How many four-letter acronyms can he fit into the familiar four-beat “Carol of the Bells?” Suffice it to say, quite a few:

MDIA, ECOA, GRMA, MBLA, URAR, RMLA, URLA, TILA…

One final thought before compliance returns to its normal, non-comedic status: if QuestSoft puts this much attention and expense into a holiday DVD/CD (there’s a separate CD with just the songs on them), we’re guessing they pay a lot of close attention to their software, too.

BUBBLE TROUBLE: We’re hearing that just as the U.S. housing markets are beginning to revive, the Canadian housing bubble is starting to collapse. We’re wondering where the rising and falling home values in the two countries will meet. Perhaps Sault Ste Marie?

OH, THOSE GRAPEVINERS: Our lively community at mortgagegrapevine.com has holiday cheer and other things on its collective mind. Like hip replacement surgery and, of course, football! If you want to see the Steelers-Browns game, here’s a chance to get tickets: http://bit.ly/VD7mDK

THIN GRUEL FOR BULK SALES: We’re hearing real estate owned investors have been forced to search for small pools and individual assets and even short sales due to a dearth of bulk sales.

It used to be investors were lining up to buy pools of foreclosed properties with plans of turning real estate owned into rentals. But the bulk sales dried up pretty quickly, Rick Sharga, executive vice president at Carrington Mortgage Services, said to us.

At the same time, there has been a huge uptick in nonperforming loan sales. Even the Federal Housing Administration has expanded its note sale program this year.

But investors are more likely to restructure nonperforming loans so the borrowers remain in the properties than to go through the foreclosure process. So NPL sales don’t really produce a lot of rental properties.

In today’s market, bulk sales of REO don’t make sense, Alice Sorenson at LRES told us.  The chief information officer at the Orange County, Calif., real estate firm maintains that bulk sales just provide special deals for investors and keep homebuyers out of the market.

While investors generally have an advantage by paying cash, “selling properties on a retail basis allows everyone to compete under the same set of rules,” she said.

LRES provides property evaluations and REO management services nationwide and uses real estate agents and brokers to sell foreclosed properties. “They do a good job for us,” the CIO told us.

In terms of performance, LRES’s list price-to-sale ratio is “consistently above 100%,” Sorenson said, which means the property is being sold for more than the listing price. “It generally runs around 106% and 107%,” she added.

MOST READ: Amilda Dymi’s story on a suit against Allstate alleging “red roof” discrimination was the most read story of the week. Congratulations, Amilda! Here’s a link to the story: http://bit.ly/VD6nU7

FINAL WORD: Happy New Year, everybody! We think 2013 will be the best year yet for the Mortgage Group, so keep on reading our content and viewing our stats and videos!

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.