Servicers Increase Use of Short Sale Strategy
One third-party vendor is seeing more of its mortgage servicer clients use short sales as a strategy to reduce timeframes and loss severity for managing homes in default. In fact, many client buyers are also using this remedy in terms of doing their due diligence when buying distressed assets in bulk sales.
"In the last year, most people who we have spoken with have started some sort of campaign for short sales. They're gearing up staff and using us as an outsourcer because they do see that it's very effective," says Brent Taggart, senior vice president of business development and the commercial division at Green River Capital, an REO asset management and loss mitigation provider based in West Valley, Utah.
"It reduces their loss severity from what we've seen about 20 points doing a short sale rather than going all the way through foreclosure and selling in REO."
Historically, buyers of nonperforming assets have purchased homes hoping "they could get somebody to repay. If not, they foreclose and sell the real estate," Taggart told Managing REO.
"There were only a few strategies during due diligence. Now people are buying with the strategy of—not only do you have the modification, you have the short sale, the REO—all of those things are being put into place."
Short sales provide another avenue for buyers of this product to go through and liquidate the property, he said. Green River Capital currently manages about 1,500 to 2,000 assets on the short sale side.
While GRC is seeing "tremendous success" in terms of going out and conducting door knocking for its clients, one of the hardest problems for servicers is uncovering "the intent" of borrower. "Do they want to pursue a short sale? Do they want to just keep going to foreclosure? Are they interested in a modification? Before, there were reperformers, foreclosure and REOs. Now there's a reperformer, a short sale and a foreclosure/REO."
In the past, servicers have been "reactive" to individual borrowers who reach out to the lender asking if they will accept a short sale offer, according to Taggart. "Most of our clients now are finding they need to be proactive because the time it takes to get an asset through foreclosure is long."
Trained neighborhood home consultants from GRC discuss HAMP and the option of a short sale with borrowers. The company spends time educating the homeowner about various remedies the bank is willing to offer. Quite often, he said, the borrower has no idea that the lender will often wave the deficiency.
"They don't know they will be offered in some certain cases money at the end of the cooperation—cash for keys or cooperation for deed-in-lieu or cooperation for a short sale," Taggart said.
"At the end of this, if it goes through, the clients will pay them to help them get on their feet again. The lender will help them find a place to live. Maybe provide first and last month's rent and the deposit. In some cases, it's as high as $25,000 offered on a cooperation with a short sale."
Cash for keys can be negotiated now. While the typical amount used to be $500 to $1,000, the aggressive offering today is about $5,000 if the borrowers "gets out by this date" and decreases after that.
Some clients hold the property 120 days. If it's not sold, the client can sign it over as a deed-in-lieu, similar to HAFA, which may make the holding time five or six months.
"At that point they might as well go through the foreclosure. A short sale doesn't hurt your credit as much as a foreclosure," he said.
Green River Capital will work with the real estate agent, helping the lender with valuation of the property. On the REO side of the business, GRC is strictly finding an agent to help sell those assets.
"It's about dealing with the client and setting their expectations of what the property is worth, and where we think we can sell it. We include any type of repairs that we may need to do to make it comparable to market properties. All of this is done in-house. Asset managers are looking at BPOs from agents, repair bids, comps in the areas, and gaining more from other sources so we can get the best value."
Monthly reports show how many people visiting a particular home this month as well as how many offers were given. GRC advises clients every month if they think there should be a price list reduction.
"You've had tremendous showings in this property, so it's probably priced right, or you haven't had any showings because people who have come through say it's priced too high or they don't like it's near a major highway. They don't like there are issues in the property in terms of outside repairs," added Taggart.
"We want to know what potential buyers are thinking about each property. All of the communication is saved in the system and is very transparent."
In states where there are high delinquencies such as California, Arizona, Nevada, Florida and Texas, borrowers are asking for either short sales or the HAMP product.