February 21, 2011
Nash Law Firm, PLLC
By: Stephen J. Nash
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From 2009 to 2010, short sales increased 80% (see OCC and OTS Mortgage Metrics Reports: Third Quarter 2010) yet some see short sales declining due to the slowing rise in foreclosures. The foreclosure statistics, however, are not the only ones to consider when planning for 2011 and beyond and the foreclosure statistics themselves might be deceiving.
Rise in Foreclosures Slowing
While it is true that the increase in foreclosures slowed in 2010, the fact is, the foreclosure rate still increased from 2.21% in 2009 to 2.23% in 2010. In addition, due to the Robosigning scandal and the resulting foreclosure moratoriums, it seems likely that the number of foreclosures in 2010 was artificially lowered.
With continuing high unemployment and underemployment numbers, foreclosures seem destined to continue to increase. DBRS (a private credit rating agency) predicts that 2011 will set another foreclosure filing record.
Loan Modification Failures
As millions of borrowers have discovered, obtaining a permanent loan modification is a difficult, long drawn out process with no guarantee that a loan modification will be obtained. What most still do not truly understand is that a majority of the loan modifications obtain end in default.
From 2008 through the first two quarters of 2010, a total of 1,506,025 loans were modified. Of this amount, 53% had defaulted by the end of the third quarter of 2010! If the new loan payment does not reduce the loan payment by 10 percent or more, 67% had defaulted! With more than half of the loan modifications entered into reducing the loan payment by less than 10%, significant future defaults are likley.
At first loan modifications were viewed as an indicator of future foreclosure and short sale rates declining. However, the end result of a failed loan modification is that it simply delays the foreclosure instead of preventing a foreclosure so we have to look at the loan modification numbers with skepticism.
Even if a borrower is not in immediate danger of a foreclosure, if they have to sell for any reason, they are faced with a short sale if there is not equity in the property. While the property value decline as measured by the mean sales price has appeared to slow, that number is misleading in that a home that was purchased for one million dollars in 2006 that sells for $450,000.00 in 2010 increases the median sales price yet the value lost was over 50 percent.
No matter how you look at it, an increase in property values will only decrease the number of short sales when the values have increased enough so that the property owner again has equity in their property. We are a long way from that occurring for most homeowners.
The “shadow” REO inventory just keeps increasing. The current number of REO properties held by lenders is approximately 2 million properties. It will take12 to 24 months to sell these properties. The American Society of REO Specialists predicts that number will increase to 4 million properties in 2011!
Since it has been well documented that REO sales drive prices down and increase the lenders cost, many have predicted that this will force the lenders to ramp up their efforts at reducing their REO inventory by increasing their loan modification and short sale programs. To date, the increase has not forced the lenders (and/or servicers, trustee, investors, insurers, etc.) to do so.
There is another factor at play that I do not have any statistics to point to but I believe is in play. More and more, we are seeing property owners who have been hanging on for years doing everything they can to save the property but are running out of assets to liquidate and, more importantly, running out of hope that they are going to be able to hold on to the property long enough for the values to come back so that they can sell without a short sale.
For many people, the stress has been intolerable and they simply can not longer deal with it. In some cases, they will be looked at as “strategic” defaulters while in other cases, they simply have run out of money. In either case, more and more people want to put this behind them no matter what the consequences.
For those dealing with short sales, it is important to determine whether the lender will look at the property owner as a “strategic” because, if the lender considers the seller as a “strategic” defaulter the odds of getting a successful short sale approval has plummeted. While the seller may still be willing to take that risk because they are not going to keep the property no matter what happens, those whose pay is dependent on a successful short sale should carefully consider whether they are willing to accept such long odds.
While there are some signs that may indicate a decline in short sales, there are too many bad indicators to believe that short sales are going any where except for up. That does not mean that short sales will become easier, quicker or more predictable. The mortgage services are the only ones that increase the efficiency and transparency of short sales. Maybe the continual increase in REO properties and political pressure will finally force them to do so but, until we actually see the change, we have to assume that short sales will involve a lot of work with an uncertain result.