Why 2010 Could Be the Year of the ‘Short Sale’

If 2009 was the year of the foreclosure (and loan modification), then 2010 may be shaping up as the year of the short sale.

In the Phoenix metro area, the number of completed short sales, where lenders allow a home to sell for less than the value of the mortgage, increased by 60% in the last three months of 2009, according to Fidelity National Title Insurance Co. In December and January, sales of bank-owned homes fell by 25% from one year ago, while short sales increased by 16% and traditional sales rose by 9%.

For years, real-estate agents have groaned about the difficulty of pulling off a short sale, which can involve a handful of third parties—the first and second mortgage holders, the mortgage insurance company, or Fannie Mae and Freddie Mac. Locking up all the approvals for a short sale can take months, leading potential buyers to walk away from the deal or a lower appraisal to scuttle the deal.

That’s especially frustrated agents because short sales let banks avoid having to foreclose and manage the property themselves, and it often results in a better price than the bank would receive if the property went to foreclosure. According to Fidelity, sales of bank-owned homes in the Phoenix region often result in $38,000 less per transaction than short sales.

A another quarterly report on loan metrics from bank regulators, which includes data on around two-thirds of all first mortgages, found that around 31,000 short sales were completed in the third quarter of 2009, more than double the level from one year earlier. (By comparison, there were 118,000 foreclosures during that quarter, a 7% decrease from one year earlier).

Housing economist Thomas Lawler has predicted that an uptick in short sales as a share of total sales could also provide an unexpected lift to home prices this year. He estimates that short sales accounted for around one in five distressed sales last year, up from around 9% in 2008.

“Given recent lender behavior, increased staffing in the loss mitigation area of mortgage servicers, and the administration’s recent “push” … to encourage more short sales,” he writes, “it is extremely likely that the recent uptrend in short sales relative to foreclosure sales will continue this year.”

Source: Wall Street Journal