Are Short Sales The Key To A Housing Recovery?

by Jim Satterwhite
on July 01, 2010 No Comments
Categories : E-Features

style=” size=’5’>Short sales have evolved as a strategy over the last year at a rate that would have dizzied Charles Darwin. Those of us who have been involved with short sales for a long time aren't surprised, as we knew they were an untapped resource that could make a real difference in the housing crisis. But lenders, investors, servicers and the federal government have discovered that short sales are more than just a resource – they are the key to making authentic progress toward a national recovery. Short sales accomplish several important goals. Most directly, they eliminate problem loans from the books without the process of foreclosure. Less than two years ago, we read frequently that foreclosure was cheaper for lenders than forgiving principal and consenting to payoff shortages. That logic, if it was ever truly present, disappeared rapidly as real estate owned (REO) inventories built up to record levels. People with funds at risk found that good short-sale offers involved concessions that were generally reasonable and represented opportunities far preferable to messy and expensive foreclosures. Moreover, short sales replace the bad loans with healthy ones from well-qualified borrowers who are excited and motivated, many of them first-timers who otherwise might have waited a long time to enter the market. Statistics are telling us that buyers are tending to wait out the housing slump, understandably reluctant to take the plunge before being certain that values have found bottom and are starting to rise once again. Obtaining a good deal via a short sale is nudging for more and more of them, and Realtors are taking more notice than ever. New buyers and former homeowners are essential to stabilizing the market and preventing the national inventory from rising beyond the already-unsafe levels we are seeing currently. Additionally, borrowers who have suffered foreclosure have to wait a lot longer to re-enter the market, further reducing the buyer universe. While short sales and deeds-in-lieu do come with credit-score hits, they are nowhere near as damaging as full defaults. With modified loans being wild cards for redefault, we need to bring as much new blood as possible into the market. Short sales help that happen, and even though they represent some additional heavy lifting for servicers, the effort is worthwhile, as many have learned over the course of this year. Servicers have also learned that nothing good happens when the REO portfolio swells. Owned real estate becomes grotesquely expensive as marketing time lengthens, neighborhoods go dark and upkeep costs soar, including penalties from governments if properties aren't maintained to standards. While short sales might have been regarded with skepticism as recently as a year ago, it is now well documented that their costs are far less traumatic to the bottom line than foreclosure and remarketing losses. By some published estimates, short sales can save 30% or more over these amounts. Unfortunately, some of the problems associated with making short sales succeed persist in creating challenges for everyone involved. In the past, Realtors would submit offers to servicers and expect them to go largely ignored. It seems that everyone knows someone who's tried to buy a home via a short sale just to eventually move on to a different property because of a lack of response to their offers. {OPENADS=zone=32} A year ago, a study by Campbell Communications found that a mere 23% of short-sale offers ended up closing, and over 90% of the real estate professionals involved blamed the failures on slow response times from lenders and servicers. No surprise there, given how slammed servicers have been ever since the crisis hit; there is, after all, a limit to how many people you can find to handle all the calls, e-mails, faxes and other tasks in the onslaught of delinquencies. Seeing great potential both from short sales and the buyers who come forward to explore them, Realtors have been persistent. Short sales have increased from 11% of the market a year ago to over 15% today. As a result of a growing number of offers, more servicers and their lender clients have seen the wisdom of giving short sales greater priority. But the workflow and paper-based processes have stymied them, and short sales, while enjoying an uptick in success rates, remain well below their potential. What's it going to take to make them work to the scale necessary to be the key to a national recovery? Technology, for one thing. Workflows and processes need automation to reduce the impact on servicing staffs and lender/investor decision-makers. Keeping so many parties on the same page is best accomplished with Web-based short-sale platforms that provide offer management; automated third-party services ordering; and secure, online dashboards to keep everyone up to speed – from buyers and Realtors, to sellers and their servicers. Otherwise, the only choice is to throw people at the problem, and that just hasn't worked well so far. Lenders and investors can load their formula, net-present-value models and other parameters into the technology platforms and pre-approve transactions that might otherwise be lost to delays. The more challenging transactions can receive the time and energy they require, while the simpler, more vanilla ones are fast-tracked by the technology. While HAFA has helped mainstream the short sale and provides incentives where they will do much good, the government is not able to do everything or come up with every idea. Fortunately, the private sector is seldom lacking in creativity, and this is especially true when there is a real estate sales commission to be earned. Networks of real estate professionals have partnered with short-sale technology firms to broaden the market's scope for both buyers and short-sale sellers. Using the offer management features, they can submit offers electronically and keep track of multiple transactions with great efficiency. An eBay-style auction concept is also taking hold, essentially using a bid process to earn the most serious bidder the first shot at a short-sale offer. During the auction process, bidders have the opportunity to inspect the properties firsthand, view valuation data and make serious offers. This approach has the effect of screening out the nonrealistic and time-wasting offers from the servicer's to-do list, helping to speed the process for all. {OPENADS=zone=17} There is also an innovative wrinkle aimed at matching investor buyers who are looking for motivated tenants to occupy the property for a few years while the market stabilizes and values rise sufficiently to bring a profit. Who better to fill the tenant role than the existing borrower, with much personal capital invested in the home and the neighborhood? These arrangements can allow the family to remain in the home while they recover their financial footing and once again be in a position to buy – and reacquire their home. It's not quite the home-retention plan envisioned by the Obama administration, but it is another by-product of the short sale. The evolution continues, and rapidly. Once an obscure industry practice, short sales are well entrenched in the minds of all these days, thanks to their many benefits. The problems posed by the complex workflows and tasks they involve will continue, but the technology assistance offered by Web-based short-sale platforms will help many transactions see successful conclusions. Short sales truly are emerging as a critical component of the national housing recovery. There are willing sellers, eager buyers and plenty of lenders wanting to minimize their losses. The tools needed to turn the key are there, and they are improving all the time. [i]Jim Satterwhite is executive vice president and chief operating officer of Infusion Technologies, the parent company of National Quick Sale, a short-sale technology platform provider and component servicer. He can be reached at jim.satterwhite@infusiontec.c

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