For example, junior-lien holders can keep short sales from being completed and mistakes in the process frequently can cause a slowdown or cause them to fail.
So one of the big questions looming on everyone’s minds right now throughout the mortgage industry is whether short sales can continue to drive the housing recovery?
Overall, there were 4.6 million existing home sales last year. Out of this figure, nearly a quarter of these were short sales, which represents the first time ever that short sales surpassed the one million completion mark.
“Short sales are helping the recovery because they sell at a higher price at a lower discount than REO inventory does. They also move more quickly than REO inventory does. This is critical because when short sales move, that is essentially one less REO,” said Rick Sharga, executive vice president at Carrington Mortgage Holdings, during a panel discussion at the Mortgage Bankers Association’s Mortgage Servicing Conference earlier this year. “So your foreclosure activity drops as your short sale activity increases. The short sales we’re seeing are reducing the backlog of distressed inventory.”
One of the main reasons why short sales have been an effective way to clear out this backlog of distressed inventory is that homeowners are now more involved throughout the process. Specifically—due to elongated foreclosure timelines in many states—a servicer now has more time to discuss loss mitigation options with a borrower. At the end of the day, the borrower is familiar with how a short sale can be finalized, which makes the process more smoothly for all parties involved, including the Realtor and servicer.
According to Phil Huff, CEO of Aliso Viejo, Calif.-based Platinum Data Solutions, a short sale can be more accommodating than doing a refinance. A second person who agrees with Huff that a short sale is a better loss mitigation strategy than possibly going to foreclosure is Ed Fay, CEO of Fay Servicing, a Chicago-based special servicer. Fay cited that a short sale is a better process for not only the investor, but also the community.
Technology is a big reason why short sales are easy to complete now than in the past. Years ago, by the time it took a servicer to get the second-lien holder to agree to a short sale and collect all of their loan documents, the servicer would have lost a buyer or lost the agent because it was so difficult to do. However, with the government-sponsored enterprises lessening the rules from a documentation and requirement standpoint for an investor to qualify and eventually close a short sale, now more transactions can get done in a timely manner.
John Vella, chief operations officer for Equator, a Los Angeles-based provider of default software solutions for lenders, servicers, real estate agents and other mortgage industry professionals, said timelines for getting the short sale started all the way through completion have come down in 2012 from the year before by over 20%. Additionally, he noted that the severity, which used to be 40% differential of loss when you did a short sale versus an REO, have also fallen to 20%, too.
“This is due to buyer’s being more educated as well as the agent’s knowing more about the short sale process,” Vella stated. “You’re seeing better training programs out there on how to get short sales done and you see servicer’s at their shops are becoming more knowledgeable about the process. So everyone in the process now over the past year has become more educated. Also, the technology has allowed everyone to look up and transfer the documents electronically, therefore creating shorter timeframes to get deals done.”
Vella said that since real estate agents have become more intelligent and trained on how to do a short sale, they are now proactively working directly with the borrowers on bringing deals to the servicers. And since technology is getting better and better every day to decrease the short sale timeline—which used to be 240 days down to 120 days—more transactions will now have the ability to close.
But according to Steven Horne, chief executive officer and president at Wingspan Portfolio Advisors, there are still several bumps in the road for a single-family housing recovery, specifically if interest rates pick up, which would basically drive away “investor appetite.”
Horne noted that in the past, almost 70% of short sales were initially rejected because the forms were ineligible, but he agreed that technology is making “great leaps forward” in the business.
“The problem with getting short sales approved compared to two to three years ago was the fact that you had one real estate agent filling out a form they didn’t understand while they were on the phone with their servicer. There was a massive imbalance of power in that relationship,” Horne added. “Now, that same real estate agent has access to a number of technological solutions that will assure their forms are completed correctly.”
Despite the progress being made within the industry regarding a greater amount of short sales being completed, both Sharga and Vella predict that there will be another three years of abnormally high levels of foreclosure activity.
Sharga said that the nation is seeing absorption rates of about 1.5 million distressed properties a year—a combination of short sales and REO sales. Even though the current absorption rate is less than the hardest hit years of the housing crisis (2008-2011), he added there is still an influx of properties in delinquency, which will cause foreclosure activity to last for a longer period of time.
“The inventories are still high as about 3 million foreclosures are sitting out there that still need to come to fruition,” Vella said. “Some of these borrowers, what motivation do they have to do a loss mitigation strategy? So you’ll see the REO volumes steady out and eventually pick up a little bit from where they are today just because the borrowers are not going to take a short sale. I think you’re also seeing some servicers are getting a little bit more aggressive, so you get to that state of normalcy.”