REQUIRED READING: Speed and short sales are too seldom mentioned in the same sentence. Although they represent a viable solution for getting bad loans off the books and limiting loss severities for lenders and investors, short sales are famously plagued with delays and frustrations.
Real estate professionals, having seen deals blow up because servicers cannot respond to offers in a timely manner, often bristle at the very term ‘short sale.’ If and when real estate agents get a response, their buyers very often have given up, and the property is well along in the foreclosure process. This was less of a problem before Foreclosure Gate, but now the legal process of foreclosure is on shaky ground, adding to investor worries of typical default scenarios. As a foreclosure alternative, short sales are looking more attractive than ever to lenders and investors alike, but servicers still have difficulty in making them happen quickly enough.
The Congressional Oversight Panel, the bipartisan group created to monitor the federal bank bailout program, recently issued a report that was critical of lender and servicer efforts under the Home Affordable Modification Program (HAMP). The program had originally hoped to save millions of homes from foreclosure, but it has only had success with fewer than 600,000 permanent modifications. With the number of foreclosures at a historic high, it is clear that we cannot count on HAMP or other modification programs to do the heavy lifting in stabilizing our housing finance system.
But short sales are shaping up to be a different story. If the industry can get a handle on processing them in a manner that is conducive to reliable, workable transactions, short sales can have a tremendous impact on the housing recovery, for several reasons. First, there is a ready pool of interested buyers available. With interest rates maintaining their lowest levels in several generations, more potential borrowers are qualified for mortgages – and those are real mortgages, ones that are fully documented and vigorously underwritten, unlike so many of the ones that put us in this mess.
Second, short sales offer the opportunity to eliminate millions of problem loans and provide millions of performing loans to take their place, immediately improving the nation's loan-quality index. Third, short sales provide great opportunities for real estate professionals, and they know it. The National Association of Realtors (NAR) has been actively advocating short sales, promoting them not only within their own ranks, but also in discussions with the government. NAR was involved in the creation of the Treasury Department's Home Affordable Foreclosure Alternatives (HAFA) program, which validated the role of short sales in the pre-foreclosure process. Prior to the existence of HAFA, one of the commonly used tactics in the late hours of short sale negotiations with lenders and servicers involved cutting commissions to real estate professionals.
These days, it has become obvious to even the most old-school servicers and lenders that they are not as squarely in the driver's seat any longer when it comes to dealing with short sales and real estate owned transactions. They cannot afford to ignore opportunities to re-market properties with minutiae-laden responses to serious offers, particularly when it also means alienating real estate professionals. The smart money these days is on foreclosure avoidance and not on lessening severity through sales after foreclosure. The market is slow, unoccupied properties require cleanup and staging, and streets with multiple vacant properties do not show as well as vibrant, living neighborhoods.
Keeping Realtors on board by reacting promptly and professionally on short sale offers, in turn, is a more enlightened and positive way to minimize losses, along with other default servicing tactics. Two keys to keeping real estate professionals are to not deny them a commission opportunity, and to give them prompt and realistic responses to offers and queries.
The first tactic – to avoid the temptation to cut real estate sales commissions at the 11th (or any other) hour – is easy. Even if doing so saves a few dollars on the current transaction, not doing so may ensure the real estate professional comes back with additional buyers in the future. The second goal is more difficult because of the massive overload being experienced by primary servicers and the lack of compensation for spending the extra time short sales require.
Response time may be improved by using a component or specialty servicer to handle short sales. Such shops may hold advantages that are often not available to primary servicers when dealing with short sales. These advantages boil down to having qualified, experienced people available to handle short sales – a particularly important consideration when sales turn complex, such as in negotiations with junior-lien holders. Another necessity in short sales is to have technology that enables all stakeholders in a transaction to be brought together without paper and with very few phone calls. Moreover, the specialty servicer compensation model often hinges on the successful completion of a transaction.
These factors can result in truncated response times. This type of response has the result of not just keeping real estate professionals engaged, but also getting them focused on short sales and the commissions they bring. Word spreads fast, too. Entire real estate specialty groups have been created to handle the increasing demand for short sales by bargain-hunting first-timers and others – but only with servicers that are cooperating and catering to Realtors in this segment.
The housing market and the rest of the economy will continue to be stymied if there are too many houses in the national inventory. No matter what else is done, the excess housing supply must be absorbed by increasing the number of qualified buyers and easing the borrowers who are currently distressed out of their homes before foreclosure, if at all possible. The short sale is the key to helping this happen on a scale that has a relevant and lasting impact on the national recovery.
Logic tells us that if we have a huge supply of qualified and interested buyers, an equally huge supply of motivated sellers and the capability to bring them all together in a low-interest-rate environment, then we have everything we need to make the deals happen. The only real problem remaining lies on the side of those who own and service the troubled loans – and all they have to decide is whether they want to lose less money now or more money later.
Steven Horne is founder and CEO of Carrollton, Texas-based Wingspan Portfolio Advisors LLC. Robert Shiller is director of Enhanced Servicing Solutions, which includes Wingspan's short sale component-servicing unit. Horne and Shiller can be reached at steven.horne@ wingspanadvisors.com and shiller@wingspanadvisors.
com, respectively.
