download the full report

One of the greatest threats to a housing recovery is the months’ supply of housing inventory available for sale. A normal market would have between 5-6 months inventory. We currently have 8.9 months of inventory and most experts believe that number will increase rather dramatically when the National Association of Realtors’ August Existing Housing Report is released today. The supply of inventory is made up of two categories of properties: non-distressed and distressed (short sales and foreclosures).

Part of the administration’s stimulus package was aimed at curtailing the flow of distressed properties coming to the market therefore easing the downward pressure on home prices.

The Home Affordable Modification Program (HAMP) is the administration’s hope for troubled homeowners trying to avoid foreclosure by modifying their current mortgage payments. The original press release said the program was:

“…aimed at helping 3 to 4 million at-risk homeowners – both those who are in default and those who are at imminent risk of default – by reducing monthly payments to sustainable levels.”

The goal was to help prevent 3-4 million distressed properties from coming to the market.

How close to goal is the program?

The administration released the August Housing Scorecard yesterday. The report attempts to convey the successes of the administration’s policies in stabilizing the housing market. The report shows that they have completed only 434,700 permanent modifications to date. The administration also just announced that of those permanent modifications, 19.6% will re-default within 9 months. That leaves over 3 million properties that will probably end up as distressed sales.

Mark Zandi, chief economist at Moody’s Analytics, probably said it best:

“The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications.”

What does this mean?

There will be more and more distressed properties coming to market. Even the Housing Scorecard addresses this issue both in print and with a graph:

“Foreclosure completions also inched upward as the volume of serious delinquencies continues to work through the pipeline.”

Though the numbers of foreclosure notices are stabilizing, the numbers of repossessions are still on the rise.

Bottom Line:

The modification program has not been the answer the administration had hoped it would be. There will continue to be downward pressure on home prices as the inventory of distressed properties continues to mount.

I recently had an email conversation with a well respected real estate professional about the difference between strategic defaults and short sales. We both agreed that we needed to share our conversation with the readers of this blog.

Original Question:

I have heard that a short sale might be better than a strategic default. However, they are painfully slow and I’m really not sure they have any “different” effect on surrounding homeowners: it’s still a massive loss of value in the area.

Whether they short-sell or not, aren’t they going to be penalized by future lenders anyway? I’m not entirely sure there’s much of a different in the “outcome” at the end of the day – short sell or walk away, they are going to suffer in creditworthiness.

And don’t short sales actually harm the bank “more” than the borrower (perhaps) because it drags out the timeframe before the asset can be put on the market, where as a walk-away can put that home on the market right away – at TODAY’s possible sales price – rather than weeks more of declining value.

Steve:

I can fully understand your overall point. However, as always, the devil is in the details.

1.) There are VERY HEFTY penalties to a strategic defaulter vs. a person who short sales (ex. Fannie Mae has decided that they will “lock out” any strategic defaulter from getting a mortgage for a minimum of seven years and will also charge them with EVERY expense incurred during the foreclosure process).

2.) The average short sale sells for 85.3% of full value. Foreclosures sell for an average of 66% of full value. Every time a house goes to foreclosure vs. a short sale the neighborhood loses that 19.3% equity difference when these homes are used as comps.

Again, I understand your overall point. I am just worried about future ramifications.

Follow-up Question:

First, I didn’t know the data on short sale vs foreclosure; my point was the “time to market” was sooner – so one thing I’d love to see in the data would be “85% of what number” because if a short sale takes 16 weeks, but a strategic default could be moved into a rental in 4 weeks and the home put on auction on week 5, I wonder which would yield a higher amount.

As for Fannie/Freddie, that’s an entire other Pandora’s Box. On one hand, I’d love to say “who cares” but we know they are fueling the market right now (just like they fueled the problem years ago). I think of it like bankruptcy – you’re “supposed” to be locked out of credit for 7 years after bankruptcy, but PRIVATE lenders start sending you credit cards right away. Yes, at higher rates, but you ARE a higher credit risk. So, will “Fannie” penalties really be so bad? Plus, once the “political sob stories” hit the streets, do you think Fannie/Freddie policies will really be enforced?

Steve:

Actually, the average length of a short sale is 6 months not 4 months. The average length of a foreclosure is 438 days or 15.6 months. So it is the opposite of what many perceive it to be.

The only thing I can think is that you are actually talking about a deed-in-lieu in which case your argument is correct. But, a deed-in-lieu is nothing like a strategic default. People who strategically default STAY in their house and force the bank to foreclose.

Regarding penalties, you have to do some reading on that. For example, in most states there is a deficiency judgment for strategic defaulters while in most short sales, and in some deed-in-lieu cases, it is waived.

Follow-up:

Ok – that surprises me – is it the bank’s fault or regulators that it takes so long to foreclose? If it’s the banks’ fault, then it’s a problem of their own making. Once the owner decides to stop paying, they should get them out asap in order to sell the asset asap.

As for deficiency judgment, maybe the owners should do a strategic default and bankruptcy at the same time. I’m not saying it’s pretty, but it’s an option. If you credit is going to take a hit – AND you’re going to lose ANY savings you might have had as equity in your home (and even that’s an assumption!) then why not just clean it all up.

Steve:

The bank has to go through a legal process to foreclose. The laws definitely favor the borrower as they should. That is why it takes as long as it does. And most courts are backed-up. The bank can’t just make the person leave.

People made uninformed decisions five years ago that are haunting them now. I just want to make sure they are not making decisions now that will haunt them in five years.

I’ve done a tremendous amount of research on this point. I firmly believe, in most cases, a strategic default is a short term solution with devastating long term ramifications. People should be advised of these ramifications before moving forward.

Follow-up:

We should post this thread online. This is the kind of stuff people need to hear!

————————————————————————————————————————————————

You can find more information on the negative ramifications to the borrower here.

You can find information on the impact defaults have on surrounding homeowners here.

The Foreclosure Ripple

Yesterday, we covered the coming surge of distressed properties that will enter the market in 2010. Today, we will discuss the impact these properties will have on housing values as we proceed throughout the year.  Questions you should be asking yourself are: 1) Do distressed properties sales impact the value of the surrounding homes, 2) If yes, then to what degree are the surrounding home values impacted, and 3) If home values are affected dramatically by distressed property sales, then what is the REO saturation level of my state?

Let’s begin to answer these questions.

Do distressed properties impact home values in a area?

Distressed properties (foreclosures and short sales), by their nature, are priced at a discounted percentage of the values of houses in the surrounding neighborhood. Here is a graph from First American Core Logic showing that percentage over the last four years:

As we can see, today’s average discount stands at about 35% of the non-distressed sales in the area. These distressed (and discounted) properties are included as comparable sales by bank appraisers to establish value of normal resale properties in a community; therefore homes in a neighborhood experiencing a foreclosure or short sale are significantly impacted.

In another graph from First American Core Logic, we can see that as the percentage of Distressed Sales increased, Prices decreased.

To what degree is value impacted financially by a distressed sale?

The Center for Responsible Lending has been studying this issue for the last several years and has actually devoted a portion of their website to this issue. Below is a screen capture of their site:

As we can see by the bottom-left number, (in my state of New York) values are negatively impacted to the tune of over $37,000!!  [You can check your state by going here.]

This situation will continue in 2010.  In a report released this month, Clear Capital stated that:

U.S. quarter-over-quarter home prices fall for the first time in nine months…REO saturation rates continue to rise.

And it occurred throughout the nation as the following visual of Home Prices from Clear Capital shows:

What does this mean to you?

Distressed properties in your area will have a negative impact on values in the community. There are many foreclosures and short sales coming. It has already started to impact prices. If you are looking to sell, do it before prices fall further.

I firmly believe the foreclosure situation will be the main story line in real estate for the rest of 2010. There will be other key factors (unemployment, government involvement, interest rates, etc.). However, no issue will have the same impact as the tidal wave of distressed properties about to come to market.

For purposes of this blog we will always consider distressed properties as those that fit into one of three categories:

1. Real Estate Owned (REOs) by banks currently
2. Houses that are in the process of foreclosure
3. Houses that are 90+ days delinquent on their mortgage payment (the reason we include this category is that recent studies have shown that less than 1% of the borrowers who fall 90 days behind ever catch up. That means that 99% of these homes will turn into distressed properties).

How many such properties are we talking about?

Below is a graph from an article in Servicing Management in February that addresses this point:

As we can see the number is almost 2 million homes and that doesn’t include any homes currently on the market. Many experts see this as a very conservative estimate.

When will this inventory start coming to market?

It already has begun. First American Core Logic released a media alert on April 8 addressing the issue. In the report they stated:

The report indicates that distressed home sales – such as short sales and real estate owned (REO) sales – accounted for 29 percent of all sales in the U.S. in January: the highest level since April 2009…The rebound in distressed sales occurred due to increases in both the REO and short sales shares. The REO share increased to 22 percent in January 2010, up from 19 percent in December but down from a year ago when it was 27 percent. Short sales accounted for 8 percent of all sales in January, up from 7 percent in December and 5 percent a year ago. During the last 12 months, there were 974,000 distressed sales: 740,000 were REO sales and 234,000 were short sales.

Even though delinquencies continued to mount, the number of distressed properties entering the market slowed over the last several months as more and more homeowners attempted to get their mortgages modified. We are now past that point and banks are taking foreclosure action on the homes that did not qualify for the modification programs. There will be a surge in distressed properties over the next several months.

According to the Irvine Housing Blog:

The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.

That is one bank calling for a 600% increase in the number of foreclosures coming to market.

How will this impact prices?

We will cover this point at length in tomorrow’s post.

The new Home Affordable Foreclosure Alternative (HAFA) program is rapidly approaching. As of April 5, 2010 the new guidelines for short sales will be in effect. Everyone should be aware of the changes and understand why this will have a tremendous impact on the real estate market throughout 2010.

Today, I want to talk about why this program is necessary, how it will work and the affect it will have on families who are struggling to pay their mortgage in today’s economic environment.

Why the need for HAFA?

More and more families are unable to keep up with their mortgage payments. Below is a table from LPS’s Mortgage Monitor presentation showing the evolution of this situation:

As we can see there are 7.4 million homeowners who are at least one month behind on their mortgage payments. A certain percentage of those families will never be able to catch up. We know from the chart that 2.9 million are at least 90 days behind. According to a study by Amherst Securities, less than one percent of those homeowners will catch up. That could lead to millions of homes going into foreclosure. The short sale process is a much better alternative.

Why is a ‘short sale’ better than a foreclosure?

For the family: In a foreclosure, the bank will determine when the borrower will ‘be removed’ from the home. In a short sale the borrower will work with the bank to determine when the new purchaser will be moving in. This allows them to leave the home with dignity.

If a family negotiates a short sale, they will be able to purchase a home again usually within 2-3 years. If they allow the home to go to foreclosure, they will not be able to purchase again for approximately 5-7 years.

In a foreclosure, the borrower could be liable for the difference between the mortgage amount and what the bank ultimately sells the house for. With the new HAFA program, the bank agrees not to go after the borrower for this deficiency judgment.

For the neighborhood: A foreclosure in many cases creates a vacant home because the homeowner, not having a set date, decides to leave. Vacant homes create all types of stress in a neighborhood, from deferred maintenance to crime. The Center for Responsible Lending reports that the value of homes surrounding a foreclosure is dramatically impacted. Here is what they say will be the impact in my home state of New York:

U.S. lost home equity wealth due to nearby foreclosures, 2009-2012:  $1.9 trillion

Statewide lost home equity wealth due to nearby foreclosures, 2009-2012:  $241.7 billion

Number of homes in state experiencing foreclosure-related decline:  6,420,239

Average loss per home affected in state: $37,649

To find out the impact in your state, you can click here.

How do I find out more about HAFA?

Here are several links that should help:

• Supplemental Directive 09-09 – The actual HAFA directive
• The Mortgage Forgiveness Debt Relief Act and Debt Cancellation - IRS rules on short sales
• HAFA brochure – new from NAR
• Text only version of the brochure
• www.realtor.org/shortsales – more information on HAFA and more detailed FAQs
• “Short Sales” tab – all the info we have posted on short sales on the KCM Blog.

Can you throw one to my house?

First American Core Logic just released their Fourth Quarter 2009 Negative Equity Data Report last week. Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth. The reason this report is so important is that studies have shown that there is a direct correlation between a home losing equity and its chances of winding up a distressed property (foreclosure or short sale).The report itself states:

Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners.

Why does negative equity lead to foreclosures?

Simply explained, once borrowers see their house fall into the situation where the mortgage is higher than the value of the home, they think differently about paying said mortgage. From the report:

The rise in negative equity is closely tied to increases in pre‐foreclosure activity and is a major factor in changing homeowners’ default behavior.

Below is a graph showing that as the home continues to lose equity the percentage of pre-foreclosure activity raises dramatically.

If you live in an area that has lost equity, there is a growing concern that near-by homeowners will make the decision not to pay the mortgage. That will lead to an increase in distressed properties in the neighborhood.

Will that be a problem where I live?

Below is a graph of the negative equity numbers by state. Any percentage of homes in that category will present a challenge. The states with the largest percentages will have the biggest problems.

The red line is the national average. Any state to the left of it has a very serious challenge.

What does this mean to you?

An increase of inventory to the market will have an effect on values in that market. An increase in distressed inventory that will be at a discounted price will have a dramatic impact on prices. If you are thinking of selling in the near future, you should be aware of how this might impact your neighborhood.

Today’s post is dedicated to helping families find an alternative to foreclosure, and helping them return to the goal of homeownership more quickly; therefore, we are emphasizing the brochure developed by the National Association of Realtors (NAR) that nicely summarizes the existing HAFA Program.

On November 30, 2009, the Obama Administration released guidelines and uniform procedures for its Home Affordable Foreclosure Alternatives Program (HAFA). Modified HAFA rules for loans owned or guaranteed by Fannie Mae or Freddie Mac will be issued in coming weeks. HAFA does not apply to FHA or VA loans.

About HAFA

HAFA, which will help homeowners who are unable to retain their home under the Home Affordable Modification Program (HAMP), provides incentives in connection with short sales and deeds-in-lieu of foreclosure.

The program:

Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.

Uses borrower financial and hardship information already collected under HAMP.

Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).

Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6%).

Requires borrowers to be fully released from future liability for the first mortgage debt and, if the subordinate lien holder receives an incentive under HAFA, that debt as well (no cash contribution, promissory note, or deficiency judgment is allowed).

Uses a standard process, uniform documents, and timeframes/deadlines.

Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to a $1,000 match for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders.

Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.

Does not take effect until April 5, 2010, but servicers may implement it before then if they meet certain requirements. The program sunsets on December 31, 2012.

TIMELINE

Notification

If a servicer has not already discussed a short sale or DIL with the borrower, it must notify the borrower in writing of these options and give the borrower 14 calendar days to respond, orally or in writing. If the borrower does not respond, that ends the servicer’s duty to give a HAFA offer.

Servicers must consider HAMP-eligible borrowers for HAFA within 30 days after the borrower does at least one of the following:

Does not qualify for a HAMP trial period plan

Does not successfully complete a HAMP trial period plan

Is delinquent on a HAMP modification (misses at least 2 consecutive payments)

Requests a short sale or DIL

Short Sale Agreement

The borrower has

14 calendar days from the date of the Short Sale Agreement (SSA) to sign and return it to the servicer. The SSA must give the borrower an initial period of 120 days to sell the house (extensions permitted up to a total of 12 months).

Purchase Offer

Within 3 business days

a copy of the sale contract and all addenda

buyer documentation of funds or pre-approval/commitment letter from a lender

all information on the status of subordinate liens and/or negotiations with subordinate lien holders.

of receiving an executed purchase offer, the borrower (or agent) must submit a completed Request for Approval of Short Sale (RASS) to the servicer, including

Within 10 business days

after the servicer receives the RASS and all required attachments, the servicer must approve or deny the request and advise the borrower.

Closing

The servicer may require the closing to take place within a reasonable period after it approves the RASS, but not sooner than 45 days from the date of the sales contract unless the borrower agrees.

The servicer must release its first mortgage lien within 10 business days (or earlier if required by state or local law) after receipt of sales proceed from a short sale or delivery of the deed in the case of a DIL. Investor must waive rights to seek deficiency judgments and may not require a promissory note for any deficiency.

FAQs

Who is eligible for HAFA?

The borrower must meet the basic eligibility criteria for HAMP:

Principal residence

First lien originated before 2009

Mortgage delinquent or default is reasonably foreseeable

Unpaid principal balance no more than $729,750 (higher limits for two- to four-unit dwellings)

Borrower’s total monthly payment exceeds 31% of gross income

How is the program being implemented?

Supplemental Directive 09-09 (November 30, 2009) gives servicers guidance for carrying out the program. A short sale agreement (SSA) will be sent by the servicer to the borrower after determining the borrower is interested in a short sale and the property qualifies. It informs the borrower how the program works and the conditions that apply.

After the borrower contracts to sell the property, the borrower submits a “request for approval of short sale” (RASS) to the servicer within 3 business days for approval. If the borrower already has an executed sales contract and asks the servicer to approve it before an SSA is executed, the Alternative RASS is used instead. The servicer must still consider the borrower for a loan modification.

What are the steps for evaluating a loan to see if it is a candidate for HAFA?

1. Borrower solicitation and response

2. Assess expected recovery through foreclosure and disposition compared to a HAFA short sale or deed in lieu of foreclosure (DIL)

3. Use of borrower financial information from HAMP

4. Property valuation

5. Review of title

6. Borrower notice if short sale or DIL not available (to borrowers that have expressed interest in HAFA).

What are the HAFA rules regarding real estate commissions?

The guidance states that a servicer may not require a reduction in the real estate commission below the amount stated in the SSA, up to 6%. However, if the servicer has retained a vendor to assist the listing broker, the vendor must be paid a specified amount from the commission.

What else should I know?

The deal must be “arms length.” Borrowers can’t list the property or sell it to a relative or anyone else with whom they have a close personal or business relationship.

The amount of debt forgiven might be treated as income for tax purposes. Under a law expiring at the end of 2012, however, forgiven debt will not be taxed if the amount does not exceed the debt that was used for acquisition, construction, or rehabilitation of a principal residence. Check with a tax advisor.

The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment, which may hurt credit scores.

Buyers may not reconvey the property for 90 days.

Here is a printable copy of NAR’s HAFA Brochure and NAR’s Text-Only version of the Brochure.  If you’d like more information on HAFA and more detailed FAQs, visit www.realtor.org/shortsales.

And if you’d like more information about short sales, you can visit our “Short Sales” tab above on the KCM Blog.

-The KCM Crew

Taking a Closer Look at Short Sales

There was an interesting article that was posted on The KCM Crew fan page the other day titled: Surge in Short Sale Requests Unlikely to Impact Housing Market. In this article, it was reported:

In the first half of 2009, only 40,000 short sales were completed, according to the most recent data available from the Office of the Comptroller of Currency shows.

In addition, (the study) said only an estimated 8 to 12 percent of all homeowners who request short sales accomplish a completed transaction.

Though both of those points were true for 2009, they are based on past results. As we have previously posted, the short sale process will change radically as we proceed into 2010.  The change will create a surge in short sales. Let me give you the evidence from which I draw that conclusion:

1.) Short Sales are already increasing rapidly.

Though, according to the Office of the Comptroller of Currency, there were only 35,428 short sales completed in the first half of 2009, there were 30,766 completed in the third quarter alone which represents a 22.4% increase over the previous quarter. The fourth quarter numbers are not yet in, but they will show another major increase.

2.) The government has determined that short sales are the answer.

The administration announced new short sales guidelines (HAFA) that will go into effect on April 5, 2010. These guidelines address the major challenges to the process which negatively impacted close ratios.

The Inspector General of TARP, in his most recent report to Congress, said:

HAFA creates financial incentives for borrowers, servicers, and investors to avoid a foreclosure by utilizing a short sale or a deed-in-lieu of foreclosure. According to Treasury, these options generally provide borrowers, investors, and communities with a better outcome than a typical foreclosure sale.

In an article in Housing Wire this week, it was reported that Seth Wheeler, senior adviser to the US Treasury Department, while at the American Securitization Forum  2010 conference in Washington DC,  said the focus of the Administration is shifting somewhat away from modifications:

“Short sales, deeds in lieu are other ways to prevent foreclosures to help achieve [housing] stability,” he said. “Modifications are only for a certain subset of distressed homeowners.”

3.) Banks are realizing that they lose less money on a short sale than they do on a foreclosure.

In an article in the Las Vegas Sun titled: Short Sales Soar while Foreclosure Sales Slacken it was reported:

In Las Vegas, banks make $80 per square foot on foreclosures but $130 per square foot on average in short sales, said Steve Bottfeld, executive vice president of Marketing Solutions.

“I think the bottom line is that short sales ultimately replace foreclosures because of the financial impact on the financial institutions,” Bottfeld said. “The banks are going to look at it differently and opt for more short sales.”

Click Here for More Short Sale Info

From the same article:

Dennis Smith, president of Home Builders Research, said short sales will be the “story of the year” because of the effect they will have on the housing market.

“It should cause prices to increase a little,” Smith said. “We have seen prices flatten the last five to seven months, and one reason is because we haven’t been flooded with all these foreclosures. They are doing more short sales.”

4.) Companies are gearing up for the surge in short sales.

Wilshire Credit Corp., the mortgage servicer bought by IBM in October, is getting set to receive a substantial servicing portfolio (short sale possibilities) from the mortgage giant Fannie Mae according to industry sources. In the article announcing this, Housing Wire said:

Any mortgage servicing put with Big Blue and Wilshire Credit, however, would not include management of bank-owned properties within the portfolio. REO Insider, a sister publication, broke the news Wednesday morning that Wilshire Credit would shed its REO operations by March 1 — seemingly to gear up for the weight of the Fannie portfolio.

Even the banks are getting ready. According to an article in DS News:

Major banks are preparing for an influx of short sales. Many claim to have hired extra staff to handle short sales, and some have purchased new software to assist in the process. JP Morgan, with one of the highest default rates in the industry, says it has hired 5,000 new employees to handle distressed sales.

Bank of America services about 14 million mortgages, including millions of troubled loans it acquired in the purchase of failed Countrywide Home Loans. The lender says it has also taken steps to prepare for an increase in short sales by upgrading its system to handle these types of transactions.

For these four reasons, I believe short sales will have a major impact on the housing sector in 2010.

If you are a homeowner who finds themselves underwater on their mortgage, it is a much better alternative to foreclosure.

If you are a buyer (and you have some patience), you have a fabulous opportunity.

If you are in real estate or mortgaging, educate yourself to the process so you can help as many families as possible.

The Treasury Department has announced new guidelines to ensure ‘short sales’ will be more readily initiated. The program starts April 5, 2010; but servicers have the option of starting sooner. The administration is taking steps to prepare for the increase in short sales that the new guidelines will create in 2010.

A short sale is a workout program that allows a borrower to sell the property, even if the proceeds are less than the loan payoff, due to low property value. If approved, a Short Sale option can help a borrower avoid further collection activity or foreclosure action.

For homeowners, a short sale provides a more dignified transition than a foreclosure as they can time the closing of the sale to coincide with their relocation instead of being evicted by the sheriff.

It will also allow them to return to homeownership sooner. Fannie Mae, for instance, requires at least a five-year wait after a foreclosure but only two years after a short sale.

Short sales are also better for the neighborhood. The home stays occupied instead of becoming a vacant foreclosure that may attract crime.

Plus, a bank loses about 50% on a foreclosed house while only losing 30% on a ‘short sale’. This means that values of surrounding homes won’t be affected as dramatically as they would in the case of a foreclosure.

You may be asking: “Then why haven’t more ‘short sales’ been done?”

That is a great question. It seems that the service companies making the decision as to whether a home should go to foreclosure or be sold as a ‘short sale’ were receiving higher fees if they foreclosed on the house.

The National Consumer Law Center revealed this in a recent report. The report stated:

The servicer’s only incentive to favor the short sale is payments by the investor for performing a short sale….Only if those payments are larger…will the servicer’s scales tilt towards a short sale.

The report broke down the fees involved. Here is a table showing the impact on fees (positive or negative) based on the action the servicing company took:

But the good news is that this situation is being corrected. Servicing agencies will now be more positively rewarded to complete short sales. And it seems the administration is going to separate servicing companies to avoid conflicts of interest. Housing Wire, on January 21, reported:

The GSEs have been quietly looking to revamp their servicing models in the wake of a historic collapse in the nation’s housing markets. The prevailing theory is that agency servicers would either be categorized as performing or non-performing loan servicers, but not both — a drastic change from current servicing models, where the same servicer often manages both performing and non-performing loans.

According to sources, so-called ‘performing servicers’ would continue to get paid via a traditional servicing strip arrangement.‘Non-performing servicers’ would receive a smaller servicing fee, but would be eligible to receive more substantial cash incentives each time a delinquent loan reperforms, or if other loss mitigation efforts (such as a short sale or deed-in-lieu) succeed.

And it seems these changes are beginning to take place. Wilshire Credit Corp., the mortgage servicer bought by IBM in October, is getting set to receive a substantial servicing portfolio from the mortgage giant Fannie Mae according to industry sources. In the article announcing this, Housing Wire said:

Any mortgage servicing put with Big Blue and Wilshire Credit, however, would not include management of bank-owned properties within the portfolio. REO Insider, a sister publication, broke the news Wednesday morning that Wilshire Credit would shed its REO operations by March 1 — seemingly to gear up for the weight of the Fannie portfolio.

The new short sale process will be crucial to housing in 2010. It is encouraging to see that the plan is coming together.

More Delinquencies=More Foreclosures= More Supply=Lower Prices

The current economy has devastated the finances of so many families in every income bracket and in almost every neighborhood in this country. More and more people are falling further and further behind in their mortgage payments. In the past people would take a second job or borrow money from family to catch up. Today, many people can’t even find a first job and few families still have the savings to help.

The 90+ day delinquency rates in every state are at historic levels. And the percentage of these borrowers who will be able to catch up on their payments are at all time lows. In this graph from Calculated Risk, we can see that delinquencies (the blue section of each bar) far outnumber current foreclosures (the red portion).

Below is a graph showing the cure rates on mortgages 30, 60 and 90 days behind in 2005 and the cure rates today.  The cure rate is the percentage of homeowners that will catch up on their payments.  Notice the severe drop between 2005 and today.

Let’s only consider those mortgages that are already 90 days+ behind. Once a home falls ninety days behind, there is less than a 1% chance the homeowner will catch up without outside help. If we calculate the number of homes currently 90 days behind based on numbers from the Mortgage Bankers Association, we get over two million homes. Ninety nine percent of them will fall into the modification, foreclosure or short sale category.

What could this do to home prices this year? A Wall Street Journal Blog 12/29/09 titled Economists React: ‘Prices Have Further to Fall’

One in four mortgages are currently underwater. Foreclosure and delinquency rates, which hit a record high at the end of the third quarter of 2009, are therefore likely to continue to rise, perhaps sharply. In addition to this, the inventory of homes for sale remains near record highs. … Despite the recent positive reports on housing prices, we believe that prices have further to fall—about another 5%-10%. — Patrick Newport, IHS Global Insight

And the luxury market could be hit the hardest. Below are two interesting graphs from data collected by First American CoreLogic. The first shows the percentage delinquencies of homes with different mortgage balances:

As we can see, the highest percentage of houses 90+ delinquent is in the $1,000,000 and above category. And that number is up over 250% from just a year ago which is shown in the second slide:

Delinquencies have to be considered one of the greatest challenges to a real estate recovery in 2010. We will keep our eye on this category and report back as this topic evolves.