Short Sales now 35% of Liquidations - REO's Down (for now)

A Research Note by Barclays Capital, indicates that short sales have been boosted by mandatory and voluntary foreclosure prevention efforts that have prevented mortgages from entering REO status.  As federally-funded loan modifications made through the Home Affordable Modification Program (HAMP) grow and lenders are expected to hold off on foreclosure proceedings, the REO pipeline shrunk, according to BarCap researchers. The foreclosure prevention efforts have had the effect of “artificially” boosting short sales.  “The artificial constraints to foreclosure auctions have resulted in a reduction in REO stock,” BarCap said. “As a result, the net volume of REO liquidations has also dropped.

As short sales are not affected by moratoria, their rate held up and their overall share in distressed sales increased.  It has now risen more than 10 points from the lows to about 35% of overall liquidations. It remains to be seen if this increase will sustain itself once the large number of loans sitting in foreclosure are finally released into REO.”  BarCap researchers pointed to the difference in severity seen in foreclosure and short sale scenarios as one of the drivers behind servicers choosing short sales.

HOWEVER, most experts agree that there is a looming shadow inventory of REO's yet to come and that foreclosure numbers are likely to stay high thru 2011 due to specific types of outstanding mortgages, specifically Option ARM's which have a greater liklihood of having values underwater when they recast.  Information regarding the Barclays research was provided by Chris McLaughlin.

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