Mortgage servicers bypass foreclosure delays with more short sales
Mortgage servicers moved more to short sales in the past year due to attorney general investigations and lengthy foreclosure delays.
By the middle of 2011, according to Moody’s Investors Service, short sales grew 25% from the 8% August 2009 liquidations of distressed properties level. In the meantime, borrower default to foreclosure grew to an average of 24 months (the average time to complete the foreclosure process in 2009 was 14 months).
The substantial delays lengthened the foreclosure processes which obviously caused greater losses by the banks and investors. As you may be aware, the foreclosure processes were halted in October of 2010 to correct mismanaged foreclosures as part of the robo-signing scandal. New regulations from the government along with negotiations between State Attorney generals are still ongoing and are causing banks and servicers to turn to short sales rather than starting the foreclosure process.
“To reduce their expenses and mitigate the high loss severity on liquidated loans, servicers are increasingly opting to bypass the foreclosure process and liquidate properties more quickly through a short sale,” Moody’s analysts said.
Short sales used to cut into “shadow inventory”
In order to cut into the “shadow inventory”, servicers of mortgages are using short sale transactions and Standard & Poor stated that short sales did actually decrease the shadow inventory within the 2nd quarter of 2011.
The average short sale took just under 12 months to sell while the average REO took 17 months in the middle of 2011. Losses dropped, as well, with banks witnessing a 70% loss rate on REO property sold in comparison to just 60% for short sales sold.
Short sales also allow borrowers to purchase a home again within 1-2 years while homes which are foreclosed upon do not allow the previous owner to purchase again for at least 5-7 years.
Even so, short sales are still difficult due to investors arguing whether or not to provide an approval for the short sale.
“Short sales, like other servicer loss mitigation strategies, may stir a fierce ‘class warfare’ between investors in different parts of the deal capital structure,” Deutsche Bank researchers said.
Short sales are the new REO
Analysts from Moody’s stated that short sales helped with the severity of losses through the market turmoil as foreclosure problems continue to hurt the recovery process. Moody’s also stated that the stabilization of average loss is helped by reducing the liquidation timeline
Do you have any additional questions about short sales and the processes associated with them? If so, please call me directly to discuss the “in’s and out’s” of short sales. 208-869-3469
