The Short Life of Short Sales


The world of distress sales deals is changing.  First it was REOs.  Then foreclosures bought at auction.  Now, short sales are showing signs that soon they’ll be going to way of the Stegosaurus.

Buried in a release from Lender Processor Services last week was a notation that the number of short sales has fallen 60 percent from a year ago, a fall from grace twice as steep as distress sales overall.  A little research confirmed the LPS report.

The California Association of Realtors reported that short sales fell to just 11.6 percent of distress sales in July, the lowest point since April 2009.  July’s figure was down from 12.9 percent in June and was about half of what it was a year ago, when short sales made up 22.7 percent of all sales.  Due its higher price structure, California is home to a disproportionate share of short sales.  In California, 60% of short sale offers failed to result in a closed sale last year, according to a CAR member survey.

 RealtyTrac reported that short sales in June accounted for 14 percent of all residential sales, down from 15 percent in May but up from 8 percent a year ago.

The National Association of Realtors reported short sales have lost half their market share in the past year falling to just 6 percent of total sales in July, down from 12 percent in July 2012.

What makes the sudden downturn in short sales more difficult to understand is the steps that have been taken to reduce the painfully long short sales time line by FHFA, Fannie and Freddie and leading lenders from Bank of America to Wells and many others.

Between seller, buyers, first and second trust lenders, buyer’s agent and lender, seller’s agent, attorneys, and investors who own piece of the property though securitize mortgages, there are lots of moving parts.  And the parts can move very slowly.  One software company, Equator, built a dandy business around its platform for short sales transaction that was adopted as virtually the industry standard.  A major roadblock that even software could not hurry up were approvals.  The new rules from regulators, GSEs and lenders speed up the approval process just as short sales seem to be declining.

Just two years ago, short sales were coming into their own.  Pushed by homeowners and real estate agents, lenders reluctantly agreed to eat large amounts of mortgages to get delinquent properties off their books.  Not until it was painfully clear they were losing more by waiting for foreclosure processing crippled by the processing scandal than by cutting their losses with a short sale.

Here are some of the reasons for the short life of short sales:

  • All distress sales, including REOs and pre-foreclosure sales, are declining.  There were only about 49,000 completed foreclosures in the U.S. in July 2013, down from 65,000 in July 2012, a year-over-year decrease of 25 percent, according to CoreLogic.
  • The pool of potential short sale candidates is still big, but steadily shrinking.  Negative equity has continued to steadily decline, freeing homeowners from the need to do a short sale.  This week RealtyTrac reported that only about 10.7 million residential properties are deeply underwater, with an LTV ratio of at least 125 percent, representing about 23 percent of U.S. residential properties with a mortgage.   That’s down from 11.3 million deeply underwater properties representing 26 percent of all residential properties with a mortgage in May and down from 12.5 million deeply underwater properties representing 28 percent of all residential properties with a mortgage in September 2012. The pool is shrinking by about 1 million a quarter or 2 percent of mortgaged homes.
  • Nearly one in four homeowners who are in the foreclosure process today has at least some equity, giving them a better chance to avoid foreclosure without resorting to a short sale — assuming they realize they have equity and don’t miss the opportunity to leverage that equity.
  • Federal programs have reduced the numbers of potential short sellers.  As of June, more than1.2 million homeowners have received a permanent modification through HAMP and 2.6 million of refinanced, many of whom, were underwater, to lower their monthly payments and reduce their risk of foreclosure or short sale.

Despite their declining numbers, where they are abundant, short sales can be a good ideal.  One of the interesting phenomena about short sales earlier this year that in some markets short sales are less expensive than foreclosures (REOs) in a number of markets where distress sales inventories are tight and where investors, including large hedge funds, are creating strong demand for foreclosures.  By the end of January, REO median prices rose above short sale median prices in the Boston, Las Vegas, Los Angeles, Phoenix, Orlando, Sacramento, Miami, Minneapolis, Tucson, San Francisco and Washington, DC metro markets.  Short sale and REO prices were virtually identical in West Palm Beach, Orlando and Oklahoma City.

Like foreclosures, you can count on short sales being more available, and easier to buyer than ever, in markets in judicial states, especially Florida, Maryland, New Jersey, and New York.  However, the day is coming when short sales will be a rarity as they were before the crash.

Photo: Universal Pops

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 Comment

  1. There are two government programs that could severely end short sales if they are not renewed at the end of 2013.
    – Forgiveness of debt – A tax bill can be enormous on a home loan paper loss.
    – Short sale program – sellers and loans are paid to complete the short sale

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