The Short Sale Potential In the Obama Era
For the last several years, short sales have been rather like the Rodney Dangerfield of the loss mitigation industry – they just haven’t gotten much respect. The strategy of the short sale has always been richly deserving of the respect Rodney joked about not getting, but the reality of making them work has been a tale of frustration and woe for all involved. They are a great idea: the lender sees its way to forgive a portion of principal and back interest in order to facilitate the sale of the property to a willing buyer, thereby avoiding the greater losses to be suffered at the end of the foreclosure process. But the reason they haven’t worked well is reminiscent of the novel, “Catch-22.” Lenders and their overworked and/or understaffed servicers have most of their resources focused on home retention tactics like loan mods rather than non-retention strategies like short sales -- even though the latter might save them more money and avoid foreclosure, which is the object of the exercise in the first place. It’s a sad fact that not everyone can afford to stay in their home even with reduced payments, and selling it before foreclosure completes is often a better option for all concerned. The abortive short sale process usually begins when a buyer is found for a home that is underwater. The seller is eager to get out from under the obligation and a Realtor tries to contact the servicer to put in an offer or inquire about one previously submitted. After many attempts of trying to connect with a servicer, who cannot possibly keep up with the volume of calls the various government default initiatives have generated, the Realtor makes contact only to be told that all of the borrower’s documentation hasn’t been received or that the valuations have yet to be ordered. Finally, many weeks or, most typically, months later, the offer is ready to be discussed. By this time the short sale is far too often lost. Either the Realtor and their buyer have become frustrated and gone elsewhere, or the borrower has been foreclosed upon and the property is part of the REO portfolio. This happens in about 82% of the cases -- and it just doesn’t have to be that way. It’s all about communication. If there was a way for potential buyers to get offers in front of decision makers quickly and have meaningful negotiations happen within a reasonable timeframe, short sales become a viable and cost-saving alternative to foreclosure. There is even the potential of a new, healthy loan for the buyer involved, but offers can’t languish on desks waiting for someone to pay attention to them. Not long ago, I was part of a task force providing input to the Treasury Department on foreclosure alternatives and found them an audience eager to find ways to keep people from foreclosure. Loan modifications have been disappointing, as it has been widely documented that 80% of the candidates have not qualified for them. Of the loan mods that are put together, almost two thirds have redefaulted in less than one year. The Treasury Department concluded that short sales are indeed a viable tool and moved to put incentives in place much like those currently being offered for loan modifications under the Obama Plan. This was a step in the right direction, but the core problem was still there – how do we make the communication part work in order to facilitate the short sale? Enter technology. Automated short sale platforms are available now to serve as workflow enhancements and markets for short sale transactions. These platforms register an offer, send it to the servicer and investor, order necessary services to determine current valuation, create net present value models and provide various economic scenarios to help decision makers make those decisions. At the same time, these web-based technologies offer portals to allow all the stakeholders to the transaction see what is going on and who needs to provide information to speed the process along. There are “dashboards” for buyers, Realtors, sellers, lender/investors, servicers and other relevant parties, cutting through the old red tape and keeping everyone on the same page of music. The workflows graphically show how far along the process is and offer prospective closing dates. The transactions can go to completion in breathtakingly short time frames, as little as a week and a half, in many cases. Suddenly, those Treasury incentives become real and achievable, more than paying the costs of the process. Default managers consult their dashboard multiple times daily to track the process of all the offers on their virtual table, and the days of having short sales falling through the proverbial cracks are over. This new reality of using short sale technology begs another question: why not use the short sale strategy as a tool in cases where modifications have been denied? In these instances, it makes good sense to have the denial letter include verbiage about contacting a short sale company to help get their property listed, marketed and sold as an alternative to foreclosure. Even if foreclosure is imminent, the process of using a short sale technology platform is minimal and not time-consuming, so there are few reasons not to put the property in the hands of someone who can provide technology-based solutions to benefit everyone. The upside is huge, especially when the volumes of distressed loans are considered: somewhere upwards of three million loans over the next year to eighteen months. If only a quarter of those that receive modification denials can be saved with a short sale, it’s an enormous cost savings for the entire industry. Short sales are rapidly finding themselves at the center of a best-hope strategy for many in the lending business. No more Rodney Dangerfield; they are getting the respect of buyers, sellers and servicers as a means to a worthwhile end. The technology makes it all coalesce and become viable, and the government incentives make the process largely cost-neutral. The era of the short sale has arrived, and the lending landscape will be better for it.Rich Rollins is the founder and chief executive officer of National Quick Sale, a renowned technologist and entrepreneur with extensive experience in mortgage servicing technology. He developed a new “smart” device for remote monitoring of vacant REO properties called REO Sentinel, and simultaneously created National Quick Sale, a web-based solution that reduces time needed to achieve a successful short sale from months to days.