Residential servicers are making a huge push to reduce REO sales and increase short sales, which is helping to stabilize home prices. But the real driver is the higher recoveries from short sales.
As a general rule of thumb, a short sale brings in 10% less than a regular sale. But an REO sale brings in one-third less.
But looking at the actual dollars makes it even more convincing.
Some servicers are finding the difference between the last short sale offer and their accepted REO price can be between $50,000 and $60,000, according to Travis Olsen, co-president of Loan Resolution Corp.
That difference allows some servicers to pay relocation costs of up to $30,000 if the borrower stays in the home until a short sale can be completed. “They are telling borrowers not to walk away from the property,” Olsen said in an interview.
It also helps to explain why servicers in proprietary short sales are willing to pay a hefty price to get a second mortgage holder to extinguish their claim. The second-lien holder can kill any short sale transaction. Some servicers are willing to pay up to 10% of the unpaid principal balance of the second lien.
It’s worth it, said Olsen. “Not approving a couple of thousand dollars extra to subordinated-lien holders is ridiculous,” the short sales expert said.
The Treasury Department recently decided to raise the amount servicers can pay second-mortgage holders under its Home Affordable Foreclosure Alternatives program. Treasury raised the buyout limit by $2,500 to $8,500 in March along with making other improvements to its HAFA short sale program.
“We have set more generous terms for extinguishing subordinated claims,” according to Michael Stegman, special advisor to the Treasury secretary on housing policy.
The Treasury official noted that many mortgage insurers issue delegations that allow servicers to undertake short sales. “But there are still challenges for servicers to extinguish liens,” Stegman told Realtors at a May conference in Washington.
Since its roll-out in the spring of 2010, servicers have completed 40,000 HAFA short sales. However, “the numbers have picked up a lot in the last year,” Olsen told NMN.
With the increase in second-lien payoff limit, Olsen sees more HAFA activity coming down the road. “I can see numbers doubling from 40,000 to 80,000 in closed short sales in a year,” Olsen said.
Treasury data show that Fannie Mae and Freddie Mac have completed just 2,600 HAFA short sale transactions. Overall, Fannie completed nearly 80,000 short sales and Freddie completed 45,500 short sales in 2011.
The Federal Housing Finance Agency wants the GSEs to increase short sales, considering the number of seriously delinquent loans on their books. The agency is developing a short sale program for Fannie and Freddie.
“FHFA wants to make this process more streamlined and efficient,” FHFA acting director Edward DeMarco told the Realtors. The GSE regulator expects the FHFA will issue the new short sale guidance by the end of September.
