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The Uphill Goal of Shifting Foreclosure-Short Sale Ratio

Short sale processing inefficiencies are challenging servicers' efforts to shift the foreclosure-short sale ratio, which currently sides heavily on foreclosures. Capacity pressures add to that challenge, at least in the near future.

Addressing a panel at the Source Media Best Practices in Short Sales and REO conference in San Diego, president and CEO of the Irvine, Calif.-based MOS Group, Greg Hebner reminded industry peers that data is not encouraging.

In the last quarter most of the Fannie Mae and Freddie Mac sales were REOs with foreclosures outpacing short sales four-to-one. The magnitude of the problem becomes even more visible in light of another fact: GSE loans including FHAs represent well over 90% of the country's mortgage loans.

Various conference speakers agreed that given the over 1.5 million properties in distress that are routinely labeled as “shadow inventory” the current ratio of four to five foreclosures for every short sale is very low. And to be able to make that shift, lenders and servicers are updating their strategies.

“It’s a learning experience for all of us in this business,” said Joe Filoseta, president and CEO, DepotPoint, Inc., Bellevue, WA. The changing market has also changed the mentality of vendors. Information technology provides primary support for REO oversight management and lender efforts to improve short sale processing efficiency.

The key is in connecting the dots, he said, since a transparent process that streamlines the flow of information connecting all the participants in the transaction from the borrower to the lender is the primary requirement to executing a successful short sale.

Despite recent improvements, lenders and servicers need to figure out strategies that will help reduce the short sale processing time as much as possible. While currently it varies from 60 days to 120 days, the percentage of short sales closed in 60 days remains at only 31%, Hebner said.

Quoting data from Core Logic, LPS Aplied Analytics, Goldman Sachs and Amherst Securities, Filoseta and Hebner warned that while the mortgage delinquency problem "is not getting significantly worse, it is not getting any better either.”

Data shows that 7 million, about 14% of all loans outstanding, are delinquent, with 4.9 million loans classified as seriously delinquent or more than two payments past due, and 600,000 new loans seriously delinquent since the beginning of this year.

Lender Processing Services Inc. reported that the nation’s average mortgage loan delinquency exceeds 500 days in five of the 23 states where foreclosures must be approved by a court.

According to a new study from TransUnion, approximately 24.4% of consumers who were 30 days past due on their mortgage payments in June 2009 became 60 days past due in July 2009, and nearly 37.6 percent of consumers 60 days delinquent on their mortgage payments became 90 days late in that same time frame.

Commenting on these findings, FJ Guarrera, vice president in TransUnion’s financial services business unit and one of the authors of the study said roll rates observed in the study reached their apex one month after the end of the recession as officially determined by the National Bureau of Economic Research, showing how credit dynamics can lag economic dynamics. “Although we may have left the worst of the recession behind as we entered recovery economically, from a credit perspective we were just hitting the toughest period for consumer default.”

Hebner said that even conservative estimates indicate that there are 3 million to 3.5 million distressed properties to be liquidated “in the reasonably near future,” with potential transaction values in the range of $300 billion to $400 billion that represent about $15 billion to $20 billion in revenue opportunity for the real estate industry.

Revenue amounts however are tempered by foreclosure losses. Hence short sales are a win-win solution for all.

According to Hebner the average loss severity from short sales is at least 15%-20% less than REO related losses—which is why a successful execution of short sales and a shift in the foreclosure-short sale ratio matters to both homeowners and lender-servicers.

For investors an REO alternative represents in excess of $200 billion in loss avoidance for mortgage investors in the next two-to-three years. That in turn means “important financial institutions and their ability to lend to help support and grow the U.S. economy” could be impacted.

Furthermore, GSE losses from REO sales “will have a direct impact” on the U.S. taxpayers.

Unless successful short sales are executed, Filoseta says, with 20% to 25% of current loans are on “under water” properties, the downward pressure on housing prices will continue going forward.

Fannie and Freddie could be doing more to facilitate short sales, he says, and the federal government could do more to press them, particularly when taxpayers are giving billions of bailout money.

“Like in a great symphony, a successful short sale performance involves each player hitting all the right notes at the right time. Similar to an orchestra, communication, transparency and timeliness are key to improving outcomes, avoiding mistakes and delivering a highly successful performance.”

But more than anything, timing is critical to long-term success, Hebner said.