Short Sales Outpace Foreclosure Sales in Many Markets

An important shift is occurring in the real estate market: Short sales are outnumbering foreclosure sales in many markets.

In Q4 2011, there were 88,303 short sales, also known as pre-foreclosure sales, accounting for 10 percent of all sales during the fourth quarter, according to the latestRealtyTrac U.S. Foreclosure Sales Report. Short sales increase 15 percent from year ago.

Meanwhile, bank-owned (REO) sales decrease 12 percent from year ago. While third parties purchased a total of 115,777 REO homes in the fourth quarter, that share was down 10 percent from the previous quarter.

“We continued to see a shift toward pre-foreclosure sales, or short sales, and away from REO sales in the fourth quarter,” said Brandon Moore, chief executive officer of RealtyTrac. “Nationally, pre-foreclosure sales increased 15 percent from a year ago while REO sales decreased 12 percent. Pre-foreclosure sales outnumbered REO sales in several bellwether markets, including Los Angeles, Miami and Phoenix, where REO sales had outnumbered pre-foreclosure sales a year ago. That trend will likely show up in more local markets in 2012 as lenders recognize short sales as a better option for many of their non-performing loans.”  

For the 12.5 million borrowers struggling with an underwater mortgage, this shift could mean good news. Moreover, a new federal policy change could make short sales a lot quicker this summer under revised rules that will require lenders to respond to short sale offers within a month.

Increasingly, private lenders nationwide are coming to the conclusion that the short sale process is more cost effective than foreclosure sales. Lenders are realizing that forgiving the difference between what is owed on the mortgage and what the home is currently worth is a smarter disposition strategy than selling REOs. Bank of America, for example, has a new 22-day short sale process known as the “Cooperative short sale program.”

The Federal Housing Finance Agency, the regulatory overseer of Fannie Mae and Freddie Mae in conservatorship, has announced new steps designed to speed up the short sale process.

Lenders and loan servicers that collect payments for Fannie Mae and Freddie Mac will be required to make decisions within 30 days after receiving an offer to purchase a short sale. If the lender needs more than 30 days, it must provide borrowers with weekly status reports and a decision within 60 days of the initial application. This extension gives lenders more time to determine the value of the property or to get the approval of a mortgage insurer.

Freddie Mac was the first government sponsored enterprise (GSE) to issue new guidelines on April 17, shortening short sale timelines. On April 25, Fannie Mae outlined their short sale guidelines.

Stating in June, these new short sale rules should kick start the short sale machinery, increasing short sales nationwide.