Short Sales Cast a Long Shadow


Yesterday the GSEs, Fanny and Freddie, accelerated the switch to short sales that has been underway for the past two years  by announcing new servicing standards to speed up and streamline  the processing of short sales for borrowers whose mortgages are held by the GSE’s, which is about half of all mortgages in the nation. 

The new guidelines, which take effect in November, allow servicers to approve a short sale for borrowers who have certain types of hardships even if they have yet to default.   The also remove barriers created by some subordinate lien holders by limiting subordinate-lien payments to $6,000. This essentially cuts off any attempts by the second-lien holders to negotiate for larger payoff amounts.  (For more, see Melissa Zavala’s post, Improved Short Sale Processing Time – Fact or Fiction?)

The GSE initiatives are just the latest in a series of steps by lenders and regulators to make short sales, which were virtually unheard of six years ago, the standard way to dispose of properties whose owners are in default.  Last year, for example, Citicorp started paying borrowers a $12,000 incentive to complete a short sale.  In May, Bank of America upped the ante, offering its borrowers up to $30,000 in cash upon the close of a short sale to help pay relocation expenses.

The Short Sale Attraction

Many lenders initially resisted short sales because of the hit they take on when properties sell far below the value of the principals.  However, experience quickly taught them that they fare worse when forced to carry properties for months, even years, during the snail-like foreclosure process only to sell them as REO at losses greater than a short sale would have cost.  Lenders have learned short sales can save them money and time.  New tools like Equator’s short sale transaction management platform and training programs for agents and loan officers have transformed the short sale into a common practice.

For borrowers, the primary attraction to a short sale over a foreclosure is also time.  Today median foreclosure takes an average of 378 days to process, the highest in records dating back to 2007, according to RealtyTrac. In the first and second quarter of 2012, properties averaged 16 months of delinquency before getting foreclosed on, according to a survey of delinquent owners by the web site. This reflects an increase in the number of months a borrower is delinquent before foreclosure starts are filed and foreclosures are completed and implies lenders and servicers are processing older foreclosures and homes that have been in default for over a year. Underwater homeowners in the survey who received a foreclosure start notice were 11 months behind on their payment. Last year, it took an average of 9 months of nonpayment before the foreclosure process started.

Year of the Short Sale

Pre-foreclosure short sales increased 25 percent to a three-year high in the first quarter of 2012. RealtyTrac reported a 33 percent year-over-year increase in pre-foreclosure sales (typically short sales) in January 2012, with annual increases in 32 states, including Georgia (113 percent increase), Michigan (90 percent increase), California (52 percent increase), Texas (48 percent increase), Arizona (44 percent increase), Nevada (36 percent increase), and Florida (20 percent increase).  Short sales outnumbered bank-owned REO sales in 12 states, including Utah, California, Arizona, Florida, Indiana, Colorado, New York and New Jersey.

Bottom Line for Investors

The switch from foreclosures to short sales as the leading form of distress sales has several important ramifications for investors.

1. The increase in pre-foreclosure sales is contributing to the decline in foreclosures by moving properties to market faster where they can be absorbed by strengthening demand.  Listings of foreclosed properties have fallen in 17 of the last 19 months through July, according to research firm Zelman & Associates. REO listings are down 47 percent from their October 2009 peak and by 23 percent from one year ago. Banks are selling more homes to investors at courthouse trustee sales, rather than taking them back themselves.

2. Shorts sales will exacerbate the differences in distress sale markets by state.  Defaulting borrowers in judicial states and states like Massachusetts, California and Nevada that have passed post-Robogate laws (See Legislating Disaster in Nevada and Maryland: Good Intentions Gone Wrong) will opt for short sales more than elsewhere, diminishing future foreclosure volumes.  Local distress sale markets will see more move-in ready short sales and damaged long-vacated foreclosures with not much in between.  REOs will dry up.

3. Current shadow and visible foreclosure inventories will not be affected directly.  Their existence will still extend the Foreclosure Era by three years or so.  But they won’t grow as much as they would without a short sale market and the supremacy of short sales will send shadow inventories on a slow decline and eventual disappearance as a market factor.  Short sales will be as easily tracked as any other listing on local MLSs.

4. Both foreclosure and short sale discounts will shrink as overall supplies of distress sales diminish in light of falling default levels.  Short sales will speed the process of absorption, reducing inventories of distressed properties for sale in local markets.   Although big discounts are still available today with short sales, RealtyTrac found that those discounts may be dwindling in some local markets as rock-bottom home prices draw in buyer demand in markets like Detroit and Washington, D.C., among others.

5. Short sales will hasten the overall housing recovery.  The overhang of foreclosures is the primary depressant today and the second greatest threat to the housing recovery, next to unemployment.  Because short sales are absorbed into local markets so much faster than foreclosures, they will reduce the depressive effect of massive foreclosure inventories stuck in the processing pipeline.

Photo: Ken Bosma

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. Do short sales have the same stigma that a foreclosure does? I ask, because I think that has some affect on the price. Do you know what percentage of short sales go to owner occupant vs investors in compared to foreclosures? I tend to wonder what affect a large volume of short sales will have on their average prices in individual markets.

    Thanks for the update Steve, I am enjoying your detailed analysis of market trends.


  2. Hi Jason,

    Thanks for your comment.

    Let me suggest that you also query Melissa Zavala, who I cited above. She’s much more of a short sale expert than I and has an investor’s perspective.

    Yes, there is a stigma associated with short sales, and it is reflected in ther discounted prices , which are generally 2 to 5 points less than foreclosures. For a fairly recent list of short sale discounts in major markets, check out this post from RealtyTrac.

    Sorry, I have not seen a figure on the investor market share of short sales, but Melissa might know. Unfortunately, there is not a lot of data on short sales, compared to foreclosures.

    I wou.d expect that short sales have less of a depressive effect on local values than foreclosures because they generally are in better shape and their disciount is less. I’m not sure how appraisers treat them under the new guidelines, but that would be interesting to find out.

    Take care,


    The Rise and Fall of Short Sale Discounts

  3. Steve,
    The information you have provided is right on with how the short sale vs foreclosures are going. When you are in a market like this we need to be able to evaluate what our weaknesses and strengths are within short sales and foreclosures. Being in this industry is hard, there are always changes in market trends, thank you for your evaluation thus far on the matter.

  4. Thanks Gregg and Sharon,

    Earlier this year I wrote a humorous column called “Big Losers and Short Sales” but I think I missed the boat on that one! (it’s on my site, Real Estate Economy Watch) You’re right, how things have changed!


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