Avoiding Foreclosure Process by Conducting Short Sales

Despite being a year later than anticipated, servicers are finally realizing that one of the better strategies to avoid the foreclosure process in which a property eventually becomes a real estate owned asset is to conduct a short sale.

Data from Lender Processing Services for January showed that short sales accounted for 23.9% of home purchases, while foreclosures accounted for only 19.7% of sales. However, a year ago, foreclosures made up 24.9% of home sales compared to only 16.3% short sales.

Borrowers are better educated now than years ago to know how a short sale should be done, said Gagan Sharma, president and CEO of BSI Financial Services during a session at SourceMedias Mortgage Servicing Conference in Dallas. A better educated borrower from our perspective is a better borrower.

Since June 2007, LPS revealed that servicers have received a higher price for a short sale transaction while foreclosure sale prices have been relatively stable over the last two years. For example, as of January 2012, foreclosed homes sold for an average of 29% less than a national average home price, only a 1% difference from January 2010. Meanwhile, in June 2007, short sales were only getting a 10% discount compared to the average national home, but as of January this year, banks were receiving a 23% savings on sales price.

Banks are getting about the same price on short sales and foreclosure sales in areas that have high levels of distressed transactions, said Raj Dosaj, vice president of LPS Applied Analytics. Clearly the mortgage industry has made significant efforts to put distressed properties through the short sale process as an alternative to foreclosure.

A RealtyTrac report showed that preforeclosure sales, which are typically short sales, increased on a year-over-year basis by 33% in January. The Irvine, Calif.-based analytic provider said 32 states experienced annual rises in short sale activity, led by Georgia with a 113% increase, Michigan at 90%, California 52%, and Texas at 48%.

Meanwhile, short sales outnumbered REO sales in 12 states in January, RealtyTrac said, indicating that lender-servicers have agreed to sell the home for less than whats owed on the mortgage, therefore preventing a borrower from going through the foreclosure process which costs more than executing a short sale. Notable states that saw a higher amount of short sales than REO sales are: California, Arizona, Florida, Utah, Indiana, New York and New Jersey.

Short sales helps the housing market in terms that were either clearing the properties out of the market earlier or were getting people to stay in their homes and keep making payments, Brent Taggart, EVP of business development at Green River Capital, told this publication. Speaking with anybody in the mortgage industry, the best solution is to have people keep making their payments and stay in their homes. Nobody wants to foreclose, but if they have to, they will.

Fitch Ratings believes conducting a short sale for a distressed real estate loan property is a positive spark for the national residential market. Specifically, Fitch said a short sale strategy for mortgage-backed security trusts could improve and shorten liquidations and lower loss severities.

Fitch expects the increase in short sales to continue because of the potential benefits afforded to both lenders and borrowers, the New York-based ratings agency said. Some borrowers may prefer short sales because, though they cannot stay in the property, they often walk away with cash incentives from lenders and healthier credit reports unmarred by foreclosure. For lenders, short sales provide a more efficient and cheaper alternative to the increasingly lengthy and costly foreclosure process.

Daren Blomquist, vice president at RealtyTrac, believes 2012 could be a record year for short sales. If there is any type of surge in short sales activity this year as, servicers have to be aware of fraud within this area.

According to CoreLogics 2012 first quarter short sale fraud trends study, one in every 60 short sale transactions appears to be suspicious. California, Florida and Arizona account for more than 67% of suspicious short sales, the report said.

Fewer suspicious short sales are occurring on same day resales, but one to four months after the short sale is completed. Approximately 60% of suspicious short sales are being flipped for at least $50,000, the Santa Ana, Calif.-based analytic provider said.

If you know which properties attract investor interest, it is easier to spot likely short sale fraud, said Susan Allen, vice president for CoreLogic at a Mortgage Bankers Association conference earlier this year. Properties that rank higher on an holistic grading score flopped for a much higher profit to the investor (potential loss to the bank) than lower grade properties. Servicers are starting to adjust their policies to scrutizine for suspicious property sales using more property data than just the value.

Linda Terrasi, senior vice president of product development and quality assurance at Flagstar Bank, also said at the MBA show that reviewing short sale documents is a critical step in preventing fraud. A short sale always requires a copy of the current listing agreement, so a servicer should require proof of funds or a lender commitment for the new borrower, Terrasi added. It is important to always compare information provided during loss mitigation or the short sale request to the original application.