Questions and Answers On 'Year of Short Sales'

Is 2010 the year of the short sale? Are lenders and servicers working more with third-party providers to make them happen or other foreclosure alternatives?

If 2009 was "the year of the foreclosure," it may very well be that 2010 becomes "the year of the short sale." The expectation is that short sales will noticeably rise from the reported 2009 figures to the end of this year. There are several factors worth noting, not the least of which is a developed sense of understanding on the lender or servicer side. When done right, short sales can be a win for the borrower and less of a loss for the investor. However, in cases where the homeowner has expressed a desire to remain in the home, a loan modification will remain the better solution.

There has been little success thus far in dealing with third-party short sale companies. Our most successful short sales have come by working closely with our clients and their agents. There may be some third-party models that add value, but our initial experience has been that they add an extra layer of confusion to the transaction.

The dynamics of short sales and REO transactions present distinct challenges in today's market. What do you think a few of the biggest setbacks are today to completing a short sale?

The biggest setback would be the level of expectations on the buyer and seller side. All agents and servicers have experienced some very challenging deals. Short sale transactions often fail because of unrealistic expectations. To address this, buyers need to be better educated on short sales and prepared for the nontraditional buying process. Sellers need to realize that the best way to complete the transaction is to partner with their lender or servicer. Too many times the seller's agent is trying to hold the deal together on his or her own, while the actual seller removes himself from the process. This will likely cause the sale to fall apart.

Do you think servicers are coming up short because they don't have the staff or processes in place to move these deals through effectively?

I can't speak for all servicers, but at our institution we are able to move short sales fairly quickly through the process. Many servicers, for good reason, were made to focus on loan modifications in 2009, and probably devoted a lot of their staffing model and training time to the new modification programs.

What seems to confuse agents and borrowers is when a lender or servicer holds more than one lien against the subject property, yet cannot approve the short sale simultaneously. In many cases, an institution may quickly approve the short sale for the senior lien, but move much more slowly on the approval for the junior lien.

Share your thoughts on possible "shadow inventory" waiting in the wings. Can the industry stop it? Or is it better to rip the Band-Aid off now at deal with it? This includes all delinquent loans and real estate-owned property that has not yet reached the market. Amherst Securities places the total at 7 million. The Royal Bank of Scotland found 2.7 million and First American CoreLogic counted 1.7 million.

As an FDIC regulated institution, we're hesitant to keep any of our bank-owned inventory off of the market. Our approach is to get it on the market and list the home for fair market value. We are careful not to list properties low in order to simply move them off of our books - rather we do our homework on the market and try to come in at a competitive number. The "rip the Band-Aid off" theory has some fundamental flaws to it. Clearly, an overflow of bank-owned inventory puts extra downward pressure on the market.

Are short sales part of the solution to this shadow inventory? Without this and other solutions, do you think the market will most likely get worse?

As with most issues, the answer likely points to the industry striking a balance. In this case, a balance between effective loss mitigation tactics, including short sales, and a more efficient process built to get the bank-owned inventory off of the books at a fair price. Well-executed short sales are certainly part of the solution because they stop properties from turning into REO homes. If the short sale is well constructed, these sales should not have quite the negative pressure on the market that REO sales have.

Kevin Beck is the Foreclosure and OREO Manager for Fremont Bank in Northern California.

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