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Short sales are important, but foreclosures are still primary [ClearOnMoney]
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Short sales are important, but foreclosures are still primary

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Commentary

Short sales are important, but foreclosures are still primary

26 Sep 2010 by Jim Fickett.

Short sales can be are more attractive to both lenders and owners than foreclosures. But there are several difficulties in the way and, although short sale volume is growing, foreclosures still greatly outnumber short sales.

Short sales have been getting a lot of press. In particular, the Washington Post just did a nice feature article explaining how short sales work and pointing to the increasing volume:

Completed short sales have more than tripled since 2008, and 400,000 of these deals are projected to close this year, according to mortgage research firm CoreLogic. The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of the year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007.

There are many advantages to short sales – often the bank can recoup more money than in a foreclosure, and the homeowner does not take the same credit score hit that a foreclosure would bring.

Nevertheless, although short sales are certainly increasing, they are by no means replacing foreclosures:

(Data are compiled from several issues of the Mortgage Metrics report. The Mortgage Metrics reports cover about 2/3 of the mortgage market and are probably representative of the overall trends. Click for larger image.)

Probably the most important reasons are that (1) in a typical foreclosure the sheriff handles the auction and a real estate agent then handles any resale, while in a short sale a bank employee gets involved in the sale itself, and the banks are not experienced in that area; (2) short sales are an invitation to fraud – it is too easy for an agent to push a sale to a friend at below-market prices, and of course this worries the banks; and (3) if a second lien is held by another lender, that lender may also need to be involved in the overall negotiation over an acceptable price.

It is good that the short sale numbers are growing, but I suspect foreclosures will continue to predominate.