Short sales are expected to overtake foreclosure in 2013 as the dominant workout solution for distressed homeowners.
Credit-rating agency DBRS attributed the change to “the record number of servicers that are using short sales as their primary loss-mitigation tool to prevent delinquent loans from entering foreclosure.”
HOPE NOW, an alliance of mortgage servicers, investors and non-profit counselors, reported this week that nearly 40,000 short sales were completed in August, bringing the total to more than 1 million since December 2009, when it began tracking statistics. Another 36,260 were completed in July.
“The increase of short sales has been significant and, for the first month since reporting on short sales, we estimate a high of 39,559,” HOPE NOW Executive Director Faith Schwartz said in a release. “Short sales provide another tool to avoid the high cost of foreclosure for families, communities and investors.”
The Office of the Comptroller of the Currency reported earlier this year that 138,000 short sales were completed in the first half of 2012, and anecdotal evidence from the industry suggested that number would continue to increase in the second half of the year.
HOPE NOW also reported foreclosure sales nationwide in August increased 12 percent to 71,149, up from 63,527 in July. And foreclosure starts increased 14 percent to 187,941, compared with 164,593 in July.
In the West, foreclosure starts have been on the decline. California saw a 20.7 percent decrease in September from August, according to ForeclosureRadar, an online industry tracker. The number of starts dropped by as much as 40 percent in Nevada and Oregon.
Regional foreclosure filings were down even more from the previous year. California dropped 48.1 percent from September 2011, while Nevada and Washington saw decreases of more than 70 percent.
Still, more than 14,000 foreclosure actions were filed last month in California.
“There has been speculation that the banks would rush to clear inventory before the California Homeowner Bill of Rights takes affect in January 2013, causing an increase in the number of foreclosures,” ForeclosureRadar said in its report. “Clearly this is not the case as we continue to see the number of Foreclosure Starts decline.”
But the recent foreclosure activity, along with the approximately 5 million homes in shadow inventory (homes 60-plus days behind or already owned by banks but not on the market), indicates the housing market has a long recovery ahead. Short sales and loan modifications will play an integral role in putting the economy back on its feet.
LOAN MOD: Despite what they may have been told by friends, family or neighbors, a loan mod that reduces the loan balance is unlikely for all but a few homeowners. Others may get a lower interest rate but still owe the full balance on their loan, later opting for a short sale when they realize just how long it will take to reach break-even.
SHORT SALE: Others immediately choose a short sale, in which a home is sold for less than the loan balance and the bank agrees to discount the payoff.
Short sales in recent years have lost their stigma as hundreds of thousands of homeowners have used it as the best solution to avoid foreclosure.
Banks responded by creating massive departments and streamlining the process. Why? Because they net 12 percent to 25 percent more money in a short sale than a foreclosure. Is it any wonder why banks prefer a short sale over foreclosure?
LEASE-BACK: This year, some homeowners are opting for a short sale in which they can stay in the home and perhaps even repurchase the property three years later. The Short Sale Lease-Back Program, which was introduced earlier this year, has become a popular option, though not everyone can qualify.
In the program, the homeowner completes a short sale to a qualified non-profit organization with the intent to lease the home for three years and then buy it back at a predetermined price, presumably less than they currently owe on the home.
Candidates must have sufficient income to pay fair-market rent and many parties must say “yes” to the deal.
Whichever solution is best for a homeowner, they must take action, or the bank surely will. Because despite recent improvements in the real estate market, local homeowners have a deep, dark hole out of which to climb.
Want to know if you qualify for any of these programs? Call us today at 951-778-9700 to make an appointment for an interview.
(Brian Bean and Timothy Hardin are Default Advocates and owners of Dream Big Real Estate. They can be reached directly at Brian@DreamBigRealEstate.com or 951-778-9700 or http://www.dreambigrealestate.com.)