How Fast Could the Short Sales Window of Opportunity Close?

Data show the distressed asset inventory is dwindling down simultaneously, opening the way to a sustainable housing recovery and gradually closing what appears to be a window of opportunity in short sales.

“There’s a multiyear window of opportunity,” time to close, says Tim Reilly, senior vice president of the short sale unit for Green River Capital, West Valley City, Utah, a provider of customized REO asset management and loss mitigation services that in 2012 experienced more than 163% growth in short sale and door knocking referrals, who remains optimistic for the near future of the short sales market.

In Reilly’s view, finalized mortgage settlement agreements and the “lifting” of the foreclosure consent order requirements makes the biggest difference in 2013 for lenders and servicers who have been hamstrung with regulation designed to discourage the foreclosure process. “As the default continuum is allowed to continue,” he adds, mortgage banks are motivated to leave their past missteps in the past while delinquent borrowers “will be more motivated to participate in a workout in order not to lose their property to foreclosure sale.” Plus, the recent FHFA decision to allow “underwater” nondelinquent consumers to participate in a short sale will also increase number of loans in the process.

Another market positive going forward is that short sales “have less of a stigma than they did in the past,” Reilly says. “A borrower who participates in a short sale is seen as actively attempting to resolve his/her situation. The ‘moral-hazard’ of not paying back a bank the full amount has become a norm with millions of homes underwater.”

The short sale market is no different than any other sector of the mortgage market, says Todd Mobraten, COO and president of USRES/RES.NET. “It’s a cyclical business and the pipeline of opportunity drives the pace.”

During the origination and refinance boom that started around 2005 it was obvious to many it could not keep the pace forever and in an extreme case would crash, he argues.

Historically, “REO pipelines have never turned off over the past 50 years, but show peaks and valleys over a seven- to ten-year period,” he says, so short sales will keep pace with the delinquent inventory, creating a demand for servicers and borrowers as delinquency rates continue to drop and the remaining foreclosure backlog bleeds out in the next few years. Given the slower pace of delinquencies, “we should see short sales significantly dropping by 2015 and 2016.”

The mortgage market recovery still is fragile enough to make everyone cautious, says Rick Sharga of Carrington Services.

“Until we work through the distressed inventory and real estate owned properties are not sold at highly discounted prices, there cannot be a true recovery.” As mortgage servicing rights change hands and special servicers take over loss mitigation and short sales, the market will change. A year from now we could be looking at a different market, a different inventory, employment rates and home sales, he says. “It is important to keep things into perspective.”

Sanjeev Dahiwadkar, founder and CEO of IndiSoft, is one of the optimists who expects the window of opportunity to be open another three to five years before the short sales market slows down.

This year will be different because the shadow inventory, delayed foreclosures and an uncertain economy “may add fire to this,” he says.

Also, the process has changed. For example, the average number of days it takes to complete a short sale will further improve thanks to “a growing sense of recognition by stakeholders: investors, insurers, servicers, that some losses have to be taken.”

Attitude changes will help accelerate short sale approvals and lead to new expansion before it starts to slow down in 2014, he says. “We should be expecting at least hundreds of thousands if not millions of short sales to go through in 2013.”

In general, Dahiwadkar says, stakeholders’ willingness “to put the past behind” will also play good role this year.

But that is way too complicated. “We may be fooling ourselves to think that yesterday’s foreclosure methods to move through the courthouse steps will soon or ever go back the way they were,” Mobraten says. “The industry has utilized time and the result of an election to predict a normalized return of foreclosure practices. I believe what we have now is the new foreclosure process.”

If in 2012 servicing practices had nowhere to turn but to a short sale for liquidating a nonperforming asset, he adds, “2013 could be construed as the year to accept a new way to foreclose, through short sales.”

A servicer’s or investor’s acceptance is only the beginning of pushing these deals through the pipeline. Borrowers and the real estate agent, in particular, will need to accept this model in their daily business routine as well. Although several real estate agents have picked up the baton and embraced short sales as their core business initiative, most agents frown upon this transaction type, even though almost 50% of the transactions last year were short sales.

2013 may not show signs of greater short sales, but the remaining delinquent pipeline will certainly provide stabilization for 2013 and 2014.