A short sale is considered a more favorable outcome for a troubled homeowner because after the transaction, a borrower can walk away with a better chance to rebuild their credit after avoiding foreclosure. The price is usually higher than a foreclosure or REO sale because the property was occupied and maintained by the owner. But the outcome could be even better if the homeowner is not required to be delinquent as a pre-condition for a short sale.
Many servicers require at least one missed payment -- despite a Treasury Department program that allows borrowers who are in "imminent danger of default" to qualify for short sale. The government program is known as HAFA, which stands for Home Affordable Foreclosures Alternatives. Fannie Mae and Freddie Mae servicers can participate in HAFA as can other servicers. (However, many servicers generally run proprietary short sale programs.)
Since its launch in August 2010, HAFA has generated 28,000 short sales. By comparison, servicers completed roughly 300,000 non-HAFA short sales last year, according to figures compiled by CoreLogic.
Travis Olsen, chief operating officer at Loan Resolution Corp., noted the HAFA program created an industry standard for processing short sales.
However, proving a borrower is in imminent danger of default is difficult. "The vast majority of the time imminent default is not considered," Olsen said.
It is easier to use a 30-day delinquency standard so investors don't raise concerns about strategic defaults or other issues. While the numbers don't show it, "HAFA has been successful in pushing the industry to take a pro-active approach to short sales," Olsen said.
Based in Scottsdale, Ariz., Loan Resolution Corp. specializes in default services and manages short sales for its clients.
Last year, the number of short sales rose 13% from 2010.
The LRC executive expects to see a bigger increase in short sales this year as mortgage servicers make a major effort to expedite resolutions and avoid foreclosures. "That is going to be the greatest change this year," Olsen said in an interview.
He noted the investor market for short sale properties is "very strong" and the timeline for completing short sales is getting shorter.
The CoreLogic report shows a surge in short sales is already underway.
"In December, short sales were 50% of REO sales activity, up from 31% as recently as last March," the firm noted.
Meanwhile, a Tampa mortgage broker is crying foul because the short sale policies of banks and credit unions in her territory are forcing borrowers to miss payments so they can qualify for a short sale. "Somehow in this country we have confused short sellers with strategic defaulters," said Pam Marron, a senior loan officer at Gold Star Mortgage Financial Group.
Marron contacted the Treasury Department -- which oversees the HAFA --and the Federal Housing Finance Agency to stop servicers from forcing borrowers into delinquency.
She noted that many of her clients are doing everything, even borrowing from friends and relatives, to remain current on their mortgage during the short sales process. Each missed payment negatively impacts the borrower's credit rating in addition to the actual short sale.
"If they are delinquent, they go through hell because their credit is wrecked," Marron said.
Borrowers who default during a short sale can qualify for a Federal Housing Administration mortgage after three years. However, the National Association of Federal Credit Unions is trying to convince Congress or HUD to extend the FHA lockout period to seven years.
Such an extended lockout period will make this a "nation of renters" and delay a housing market recovery, the Tampa broker said.
NAFCU executive vice president Dan Berger noted that borrowers who have the ability to pay are being encouraged by consultants to engage in strategic defaults. Coupled with the three-year clause, “this is encouraging folks to walk away," Berger told National Mortgage News.
He stressed that NAFCU's effort is not intended to discourage short sales or other efforts to assist struggling homeowners. "Credit unions are known for doing loan modifications and other workouts for members that run into problems," the NAFCU executive said.
