Short sales could accelerate the resolution of the housing crisis—if the process is streamlined by the big federal mortgage lenders
Charles Wright of Henderson, Nev., fell behind on his mortgage last year after a divorce squeezed his finances. He twice arranged to sell his house for less than its loan balance, a so-called short sale, only to see the buyers walk away because it took too long to get approval from the holder of the mortgage. "I couldn't even get a call back, never mind a yes or no," says Wright, 30, whose loan was owned by Fannie Mae (FNMA), the government-run mortgage-finance company. "Why make it so hard to sell when the alternative, foreclosure, means an even bigger loss for lenders?"
Good question. Thomas Popik, research director for Campbell Surveys in Washington, which conducts national monthly surveys of 3,000 real estate brokers, says more short sales could stem steep home-price declines. Although the home is sold for less than the mortgage in a short sale, it stays out of foreclosure, where the holder of the loan seizes the house and auctions it off at a steep discount to current value. "Any time a short sale can be substituted for a foreclosure, it's extremely good for the housing market," says Popik.
There were 243,000 short sales in the first 11 months of last year, according to CoreLogic (CLGX), a research firm in Santa Ana, Calif. That compares with 1.2 million notices of pending auctions in the same period. A lengthy consent process by loan holders deters potential buyers from agreeing to a short sale. In a normal home sale, people make an offer and get a decision from its owners within days, if not hours. For a short sale, the average time between a price bid and response is three and a half months, according to Campbell. The California Association of Realtors estimates that delays kill about half the short-sale deals in the state.
The biggest mortgage holders, Fannie Mae and Freddie Mac (FMCC), completed 7,768 short sales in January, down from 9,373 in the prior month. "I get the sense that Freddie and Fannie have been trying harder to make things work, say, over the last 8 or 10 months, but it still is a fight to get these deals through," says Ron Wilczek, owner of Metro Phoenix Homes, a real estate agency in Tempe, Ariz.
Fannie Mae approved a short sale for Wright, the Nevada homeowner, after he found a third buyer. A deal went through on Feb. 15, two weeks before the house's scheduled foreclosure auction. The price was $265,000, 37 percent less than what Wright paid in 2007 and about $125,000 short of what he owed Fannie Mae.
If Wright's property had ended up in foreclosure and got sold at the local auction venue—a parking lot near the casinos and wedding chapels of the Las Vegas Strip—Fannie Mae's loss might have been greater. Foreclosed properties typically sell at a 28 percent discount to current market value, according to RealtyTrac, a real estate data company in Irvine, Calif. At least Wright, in his short sale, sold his house for close to its current value.
When it comes to approving short-sale offers, what seems like dawdling to buyers and sellers may be lightning speed to the mortgage industry, says Faith Schwartz, executive director for the HOPE NOW Alliance in Washington, a group of home-loan investors, lenders, and mortgage servicers including Bank of America (BAC) and Wells Fargo (WFC). Before a short-sale offer can be approved, the holder of the home loan must agree to the price, she says. Other parties may have to assent as well. About half of troubled mortgages involve homes that have so-called second liens such as home equity loans, according to the Treasury Dept. Mortgage insurers may get involved, too.
"All those pieces have to fall together, and that takes time," says Schwartz. Fannie Mae has set up a program that lets real estate agents talk directly with Fannie when they run into roadblocks during a short sale, says Marcel Bryar, a vice-president at the mortgage financier.
The Federal Housing Finance Agency, which regulates Fannie and Freddie, wants short sales to be "consummated efficiently," says Corinne Russell, a spokeswoman. Short sales can prevent neighborhood decay by limiting the number of vacant homes and can "ultimately help save taxpayer dollars," she said in an e-mailed statement.
Marie McDonnell, owner of Truth in Lending Auditing & Recovery Services in Orleans, Mass., says loan servicers may be responsible for the delays in short sales. Servicers earn fees by sending the monthly bills and collecting mortgage payments, though they typically don't own the mortgage. They also are in charge of communicating with the mortgage holder when the homeowner wants a short sale. That power gives the servicers the motivation to drag their feet as they rack up additional late fees. In Wright's case, Fannie Mae says it acted in a timely manner once it was told by the servicer of Wright's request.
Chris Killian, a vice-president at the Securities Industry and Financial Markets Assn. in New York, says servicers dealing with an avalanche of defaulted mortgages generally don't have an interest in keeping loans in limbo. Says Wright: "Everyone could save a lot of headaches if the process could be speeded up."
The bottom line: Short sales could accelerate the resolution of the housing crisis—if the process is streamlined by the big federal mortgage lenders.