Streamlined Short Sales Stabilize Housing Markets
Mr. Liniger is the chairman and co-founder of Re/Max International Inc. Mr. Acosta is the chairman of New Vista Asset Management and is the co-founder of the National Association of Hispanic Real Estate Professionals.
Record level foreclosures are predicted to be with us for some time. In the next few months, some 700,000 bank-owned properties that were embargoed by various moratoria will flood the market. Rising unemployment, resetting loans and redefaults will all combine to drown America's neighborhoods in a sea of new foreclosure signs. Just like a scene out of the ironic comedy "Groundhog Day," we'll be right back where we started. With grim forecasts of even greater losses to come, the industry is obligated to re-examine what it can do differently to break this cycle. Without question, the conversation needs to start with short sales, a process that has broken down and demands attention.
Homeowners Are Unaware of Their Options
In our earnest desire to help people stay in their homes, we have overlooked our obligation to help them sell their homes to avoid foreclosure. Fifty-six percent of all residential properties sold today are distressed, but only 19% are short sales. Seven out of 10 homeowners who go into foreclosure lose their homes without ever listing it for sale. Unaware of their options, beleaguered homeowners are left to navigate the maze of automated bank phone systems and help lines with few real practical solutions coming their way.
For those who learn about and pursue a short sale, they are reliant on their agent's familiarity with an imperfect system. Typically, homeowners must be behind at least two mortgage payments before a lender will entertain the option of a short sale. If the lender approves the sale and the house gets listed, the next hurdle is turnaround times on offers. Usually, lenders take too long to respond, and the buyer loses interest and moves on. The sale inevitably falls through. More often than not, the home goes on the market as a foreclosure and sells months later for a price much lower than the short sale offer.
Everyone Benefits from Streamlined Short Sales
The Treasury Department recently announced a plan that would establish new procedures and financial compensation for home sellers and lenders who complete short sales, demonstrating that the administration recognizes the critical role that short sales can play in stabilizing property values. While these incentives will undoubtedly initiate an interest in short sales, we must recognize that we are dealing with a flawed system that requires a significant overhaul of the entire process. The benefits of such an overhaul are considerable:
* Damage control for homeowners. A short sale offers tangible emotional benefits that make consumers feel like they have choices and a measure of control over their situation. Also, they will not suffer the same credit damage created by foreclosure.
* Neighborhoods stabilize. Neighborhoods will not further erode. Families stay in their home until it is sold. So, properties are maintained in the character of the community, with fewer vandalized homes and hazardous green pools. Values stabilize.
* Lenders save. Lenders can reduce credit losses by an average of 25% with a short sale vs. a foreclosure sale. Additionally, closing costs and legal fees are lower for a short sale.
* Foreclosure is avoided. An improved short sale system directly supports all the current efforts to avoid foreclosures.
What an Improved System Would Look Like
If the current dysfunctional short sale model was scrapped and we created a new one, it could take the following form:
* Dedicated short sale team. Lenders would create teams trained to specifically monitor and manage the short sale process. These teams would utilize state-of-the-art valuation methods to arrive at accurate, "forward looking" valuations. They would obtain "delegated authority" from outside investors to establish acceptable price ranges. In addition, they would identify potential short sale candidates and coordinate the process with real estate agents.
* Agent training. Real estate agents would receive comprehensive training and even earn a specific short sale designation. They would receive critical support negotiating with mortgage insurers and second-lien holders early in the transaction.
* Improved communications with consumers. Trained real estate agents, well versed in the new innovative process would be able to effectively communicate and guide homeowners through each step of the process with confidence.
* Standardized documentation and guidelines. Standardized documentation and transparent, easy-to-understand guidelines would make the process more efficient and would reduce the number of unrealistic offers.
* Acceptable commissions. A market-based commission structure will ensure the right economic incentives are in place for the listing and buyer's agents. Many lenders believe that reducing commissions saves money, but in today's market where there is an excess supply of inventory, the reality is that appropriate commissions attract the most experienced agents, who can obtain the best price in the shortest time.
* Proactive short sales strategy. Currently, most short sales are initiated by homeowners. However, a more productive scenario would be for lenders to identify and communicate proactively with homeowners. Obviously, those who fail to qualify for loan modifications and face immediate foreclosure are ideal short sale candidates. They are easily identified and could be handed over to the short sale team for personal contact. If a short sale is a viable option, the homeowner would be introduced to a well-trained listing agent, who could help them sell their home. Because such a large percentage of affected consumers are minorities, bilingual representatives would help ensure that all homeowners truly understand their options.
Finally, creating awareness among consumers is crucial to making a redesigned short sale program, such as this, a success. An industrywide campaign to educate homeowners about short sales is a must, with outreach that would include nonprofit housing counselors and resources in the hardest impacted minority communities. Special incentives like cash for relocation expenses should also create significant momentum.
Pros Outweigh the Cons
If we do not provide homeowners with effective methods for avoiding foreclosure, the rate of foreclosures will continue to rise and home values will plummet further. This will put additional pressure on an already fragile financial system and delay true recovery well into the next decade. On the other hand, if the industry accepts the challenge and streamlines the short sale process, we can reduce foreclosures, lower bank losses and stabilize home values. Clearly, the pros far outweigh the cons. The improvement of efficiencies and the resulting success rate for short sales is an essential piece of our overall economic recovery, and must be put in place as soon as possible.