Although short sales continue to be utilized more and more as an alternative to foreclosure, RealtyTrac suggested the trend may change if the Mortgage Debt Relief Act of 2007 does not get extended.
According to RealtyTrac’s Q3 foreclosure and short sales report, short sales increased quarterly and yearly by 15 percent and 17 percent, respectively. Out of all residential sales, short sales represented about 22 percent of the total in Q3. “However, the scheduled expiration of the Mortgage Forgiveness Debt Relief Act at the end of this year could stifle this trend toward short sales,” said Daren Blomquist, VP of RealtyTrac.
The act, which will expire at the end of this year if not extended, allows borrowers to be excluded from paying taxes on forgiven debt from a short sale, foreclosure, or modification. “The prospect of being taxed on potentially tens or hundreds of thousands of dollars in additional income may motivate more distressed homeowners to forgo a short sale and allow the home to be foreclosed,” Blomquist continued. “Additionally, if the mortgage interest deduction is eliminated due to the fiscal cliff quagmire, it would give many underwater and otherwise distressed homeowners one less reason to hang on to their homes.”
On average, short sales—including non-foreclosure and foreclosure properties—were sold $94,896 below the loan amount. Pre-foreclosure sales—properties in default or scheduled for auction—were also up in Q3 and increased by 22 percent both quarterly and yearly. On average, pre-foreclosure properties sold at a discount of 27 percent compared to non-foreclosures, up from 25 percent in Q2 and 19 percent a year ago, according to RealtyTrac.
As for REO properties, purchases rose 19 percent from the previous quarter, but were down by 20 percent from last year. The foreclosure marketplace found REOs were sold 38 percent below the average price of non-foreclosures, up from 33 percent in Q2 and down from 39 percent a year ago.
RealtyTrac says that unlike the trend seen in recent years, sales of properties in pre-foreclosure outnumbered sales of REOs in the third quarter. Pre-foreclosures totaled 98,125 in Q3 compared to 94,934 for REOs. When combining REOs and pre-foreclosures, a total of 193,059 properties were sold in Q3, representing a 21 percent increase from Q2, but a 3 percent decrease compared to Q3 2011.
As a share, foreclosure-related sales remained relatively flat in Q3 and accounted for 19 percent of all residential sales, down from 20 percent in Q2 and unchanged from a year ago.
The states with the highest share of foreclosure sales out of all residential sales were Georgia (38 percent), California (36 percent), Arizona (34 percent), Nevada (31 percent), and Florida (26 percent).
Among the metro areas, California metros took the lead for having the highest share of foreclosure sales. In Modesto, foreclosure sales represented 54 percent of all sales. Other California metros with a high percentage of foreclosure sales included Stockton (53 percent); Riverside-San Bernardino-Ontario (47 percent), and Sacramento (40 percent). Non-California metros in the top 10 included Atlanta (41 percent) and Tucson (40 percent).
In its May 2012 foreclosure newsletter, RealtyTrac named the top 10 places to buy foreclosures in 2012. The selected locations were out of the 100 largest metropolitan statistical areas based on population. The list was further narrowed according to markets with at least 200 foreclosure-related sales transactions in January 2012. Then, it was whittled down again to only include metros with foreclosure sales prices at least 30 percent below the average price of a non-foreclosure property.
The number one metro to buy a foreclosure in 2012 is Kansas City, Missouri, where the average foreclosure sales price is $73,257 compared to $101,710 a year ago. The average discount for foreclosures is 51 percent. Overall, foreclosures make up 29 percent of all sales in this metro. Citing data from the Kansas City Regional Association of Realtors, the newsletter stated home sales in Kansas City rose 14 percent in March from a year ago, and prices increased 3 percent from a year ago.
With vacant homes stretching the capacity of banks’ balance sheets and homebuyer demand lackluster at best, short sales are becoming a top loss mitigation choice for private lenders and investors, particularly in especially hard-hit markets.
According to Barclays Capital, the benefits of pursuing a short sale are compelling for servicers and investors who are able to liquidate delinquent loans in an expedited fashion with fewer payment and interest (P&I) advances and who take “quasi” possession of the property in better condition and at better prices than REO, lowering severities. Barclays’ analysts say they’ve found much of the reduction in severities from utilizing a short sale over an REO sale are explained by better composition and trimmed timelines. While the discount stemming from the stigma associated with an REO due to upkeep and vacancy still plays a role, it accounts for only about 30-40 percent of the severity difference, they explain.
Pursuing a short sale is often thought of as a painstaking process, and it’s not uncommon to hear of complaints about slow responses from servicers and last minute rejections on offers. Fortunately, not all lenders/servicers are the same when it comes to dealing with short sales, and RealtyTrac compiled a list of data revealing which institutions tend to move through the process quicker and for less.
Fannie Mae, Freddie Mac, and FHA had the shortest timelines at 193 days in January 2012, a decrease compared to a year ago in January 2011, when short sales averaged 248 days. Ally Financial came in second at 321 days, reducing its timeline as well from 393 days a year ago.
PNC Financial Group was third, taking 353 days, though the bank takes longer than it did a year ago when the it took 206 days. Wells Fargo came in fourth (385 days). Bank of New York Mellon took the fifth longest (402 days), followed by Bank of America (403 days) and Sun Trust (404 days). The short sale timeline includes the time a property starts the foreclosure process to the time it’s sold as a pre-foreclosure property.
Recently, Fannie Mae and Freddie Mac announced new guidelines to take effect in June requiring servicers to respond within 30 days after receiving a short sale offer or a borrower application. Bank of America recently announced that its providing a decision on a short sale offer in 20 days.
In terms of pricing, Fannie Mae, Freddie Mac, and FHA sold homes for the least amount in January 2012, averaging $128,642, a drop from year ago prices in January 2011 when they averaged $160,982. Deutsche Bank’s average price was $132,996, followed by Sun Trust Banks ($144,024), and CitiGroup ($148,411), and PNC Financial Group Inc ($149,332). Bank of America Wells Fargo were the bottom two on the top 10 list, averaging $158,632 and $167,371, respectively, for January 2012.
As for the number of short sales, Bank of America completed the most in January 2012, with 5,276, followed by Chase (2,967), Wells Fargo (2,788), MERS (1,429), and Bank of New York Mellon (1,401).
Short Sales Bring 24% Greater Returns than Foreclosures
The real estate professionals at Massachusetts-based McGeough Lamacchia Realty have been proponents of short sales for quite some time, insisting that everyone comes out ahead when a short sale is achieved as opposed to a foreclosure. Now they’re sharing the facts that back up their claim.
On average a home sold through short sale brings a 24 percent greater return than a foreclosed property, according to recent findings from McGeough Lamacchia Realty.
“This means the banks are losing an average of $43,000 for every foreclosure sale compared to what they would have made in a short sale,” said a blog post on the company’s website.
The firm reviewed prices for short sale and foreclosure sale properties in 2010 and 2011 in Boston, Phoenix, Tuscon, Southern California, and Southwest Florida.
While banks often offer incentives to homeowners who pursue a short sale, “more needs to be done to promote short sales,” McGeough Lamacchia said. Specifically, the firm points out that Fannie Mae and Freddie Mac are not offering the cash incentives for short sales that are now standard through the Home Affordable Foreclosure Alternatives program.
“Fannie Mae and Freddie Mac need to do more to promote short sales and make it easier for distressed homeowners to do a short sale and avoid foreclosure,” McGeough Lamacchia said in their blog post.
Six former executives at Fannie Mae and Freddie Mac are now facing securities fraud charges for misleading statements regarding subprime loans. The Securities and Exchange Commission (SEC) filed the charges Friday in a U.S. District Court for the Southern District of New York.
“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, director of the SEC’s enforcement division.
“These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books,” Khuzami stated.
The former Fannie Mae executives who allegedly either made or approved misleading statements between March 2007 and August 2008 include former CEO Daniel H. Mudd, former chief risk officer, Enrico Dallavecchia, and former EVP of single family mortgage, Thomas A. Lund.
For example, Fannie Mae reported subprime loans made up 0.2 percent, $4.8 billion, of its single family portfolio. At the time, the company also held $43 billion in “expanded approval” loans made to borrowers with weak credit histories.
Similarly, the SEC says Freddie Mac stated publicly its single-family portfolio had “basically no subprime exposure,” while internally it acknowledged it held $141 billion in subprime or “subprime like” loans at the end of 2006, making up 10 percent of its single-family portfolio.
In mid-2008, subprime or “subprime like” loans made up 14 percent, or $244 billion of Freddie Mac’s single-family portfolio.
The former Freddie Mac executives facing charges include former chairman of the board and CEO, Richard F. Syron, former EVP and chief business officer Patricia L. Cook, and former EVP for single-family guarantee business, Donald J. Bisenius.
The SEC alleges the individuals either made or approved untrue portrayals of their subprime exposure to the public, investors, and the media. The former Fannie Mae executives are also facing charges for misrepresentations of its Alt-A loans. While claiming Alt-A loans made up 11 percent of its single-family portfolio, Alt-A loans actually made up 18 percent of the portfolio.
“All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors,” Khuzami said.
Both GSEs entered a non-prosecution agreement with the SEC “in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability,” stated a press release from the SEC Friday.
Both GSEs also agreed to cooperate in the litigation against their former executives.
Foreclosure activity slipped 3 percent in November when compared to the previous month, but filings at various stages of the process showed starkly different movements, according to RealtyTrac’s latest market report.
Scheduled auctions hit a nine-month high following the default surge that began in August. At the same time, RealtyTrac says REO activity is at a 44-month low.
Total foreclosure filings – reported on 224,394 U.S. properties in November – are down by double-digits from a year ago, but RealtyTrac doesn’t view the numbers as the making of a trend.
James Saccacio, co-founder of RealtyTrac, says the 14 percent year-over-year decline in filings last month is the smallest annual decrease recorded over the past year, and he points out that some bellwether states such as California, Arizona, and Massachusetts actually posted increases in foreclosure activity from November 2010.
“Despite a seasonal slowdown similar to what we’ve seen in each of the past four years, November’s numbers suggest a new set of incoming foreclosure waves, many of which may roll into the market as REOs or short sales sometime early next year,” Saccacio said.
Default notices (NOD, LIS) were filed for the first time on a total of 71,730 U.S. properties in November. Foreclosure auctions (NTS, NFS) were scheduled on 96,540 properties during the month, and lenders repossessed (REO) a total of 56,124 homes. Nevada posted the nation’s highest foreclosure rate for the 59th straight month. Filings rebounded 3 percent in November from a 45-month low in October, when a new law was passed altering the foreclosure process in the state.
One in every 175 Nevada housing units had a foreclosure filing last month, more than three times the national average.
Scheduled trustee’s sales in California hit a 10-month high in November, helping the state maintain the nation’s second highest foreclosure rate. A total of 26,509 trustee’s sales were scheduled in California last month, up 14 percent from November 2010 – the first year-over-year increase in scheduled foreclosure auctions in the Golden State since March 2010.
Arizona foreclosure activity increased on a year-over-year basis in November for the first time since October 2010. With filings up 4 percent from a year earlier, Arizona posted the nation’s third highest foreclosure rate for the fifth month in a row.
Substantial monthly increases in foreclosure activity in Utah and Georgia lifted those states’ foreclosure rates into the nation’s top five in November. Utah’s foreclosure rate ranked No. 4 thanks to a 74 percent monthly increase in foreclosure activity. Georgia saw a 23 percent increase in filings, giving it the No. 5 spot. Other states with foreclosure rates ranking among the top 10 were Michigan, Florida, Illinois, Ohio, and South Carolina. South Carolina cracked the top 10 for the first time since RealtyTrac began issuing its report in 2005.
“Foreclosures are going to go up before they go down,” according to Craig Nickerson, president of the National Community Stabilization Trust.
Nickerson says estimates put foreclosure tallies at 850,000 this year, as high as 1.5 million in 2013, and then back to the levels we’re at today by 2015.
With all these distressed properties potentially making their way to an already stressed marketplace, Nickerson, along with a panel of industry professionals at the inaugural MPact Conference advocated for bulk short sales.
The panel discussion centered around neighborhood stabilization initiatives and HUD’s $7 billion program created to facilitate the rehabilitation of properties in communities challenged with high levels of foreclosures and property vacancies – aptly named the Neighborhood Stabilization Program (NSP).
“Foreclosure prevention by itself is not going to [be the] cure” for the housing crisis, Hala Farid, deputy director of Citigroup’s Office of Homeownership Preservation, told those attending the standing-room-only session.
Farid says Citi is devising a procedure where NSP program participants will have access to escalated points of contact to expedite the short sale process in support of neighborhood stabilization efforts. Francis Martinez Myers, president of Employee Transfer Corporation (ETC) and ETCREO Management, said the industry is “on the cusp” of utilizing short sales as a viable means of stabilization, “but it’s not without its challenges,” she added. “Lenders have to be aggressive about offering pre-approved listing prices for short sale properties,” according to Myers. She says having pre-approvals in hand would help facilitate transactions for bulk short sales.
Myers described the size and magnitude of this crisis as unprecedented. “I feel like we are in a five-alarm fire and we are still negotiating over which kind of garden hose we’re going to use … If we’re not careful and not aggressive, it’s going to be very difficult to get through this,” she said. “Holistically we’re not doing enough fast enough,” according to Myers. Just “selling one house at a time, means 10 years from now we’ll still be here having this conversation,” Myers said.
She spoke of the advantages of tailoring services that are geared toward investors and nonprofit groups to facilitate bulk purchases of short sale properties.
Myers says her organization is working on a pilot initiative which aggregates available short sales in the market, pools together properties meeting investors’ and nonprofits’ qualifications, and lines them up for inspection.
Tyler Smith, VP of Wells Fargo’s REO disposition team, noted that managing investor participation with communities’ neighborhood stabilization efforts “can sometimes be a conflict of interest.”
According to Jerome Devadoss, manager of alternative dispositions for Fannie Mae’s REO sales operation, it’s important to engage community-minded investors to work alongside local nonprofits toward neighborhood stabilization, whether it’s through short sales or any other loss mitigation strategy.
Jim O’Donnell, manager of the West Coast REO Revitalization Program at Chase, says his company is exploring ways to facilitate short sales to nonprofit organizations. Chase is looking to make short sales and distressed portfolios part of its “First Look” program.
Short sales are increasingly making their way into the conversation as a practicable solution to support neighborhood stabilization.
Eric Will, senior REO sales director for Freddie Mac’s HomeSteps division, said “knowledge around this [short sale] space is growing. We know it needs to be done.”
Foreclosure Activity Increases for Third Straight Month
Foreclosure filings in October rose 7 percent from the previous month, RealtyTrac reported Thursday.
Including default notices, scheduled auctions, and bank repossessions – which all increased month-over-month – filings were reported on 230,678 U.S. properties in October.
That grand total is down nearly 31 percent from a year earlier, when servicers began putting the brakes on foreclosure actions due to paperwork issues. But RealtyTrac has documented a rise in filings for three consecutive months now – a sign that servicers are working through the backlog of cases that have been delayed. While the October numbers indicate unpaid mortgages are finally making their way through the pipeline, James Saccacio, RealtyTrac’s CEO, says he’s concerned other forces at work could throw a wrench in foreclosure processing.
“[R]ecent state court rulings and new state laws keep changing the rules of the foreclosure game on the fly,” Saccacio said, “creating more uncertainty in the housing market and threatening to prolong the road to a robust real estate recovery.”
Nevada is one example of a change in foreclosure rules. It saw a 34 percent decrease in filings, driven by a new state law that took effect in October and requires lenders to sign and record an affidavit with key information about any pending foreclosure.
The foreclosure hotbed of Las Vegas recorded a 36 percent decrease in overall foreclosure activity, caused by an 80 percent drop in new default notices from September to October. Las Vegas had held onto the title of highest metro foreclosure rate for 22 consecutive months, but with October’s decline, it slipped to the No. 5 spot.
The 1,201 new defaults in the whole state of Nevada last month was its lowest since June 2006. Even with the sharp drop-off in activity, Nevada posted the nation’s highest state foreclosure rate for the 58th straight month. Defaults in California, Florida, and Michigan – on the other hand – all rose to their highest levels in at least a year.
California default notices increased 17 percent from the previous month to 29,240, pushing the state’s foreclosure rate to the second highest in the nation. A sharp monthly increase in both new default notices and scheduled auctions boosted the foreclosure rate in Florida to fourth highest among the states. A total of 15,234 new default notices were reported in Florida last month, up 28 percent from the previous month. Scheduled auctions in Florida hit 10,655 in October, up 57 percent from September.
New default notices in Michigan also reached a 12-month high, increasing 13 percent from the previous month. The state posted the nation’s fifth highest foreclosure rate for in October.
Wedged in there at No. 3 was Arizona. Total foreclosure activity there increased nearly 18 percent from the previous month, but was still down 36 percent from October of last year.
Other states with foreclosure rates ranking among the top 10 were Georgia, Illinois, Idaho, Oregon, and Colorado.
Administration Announces Refinance Program for Underwater Borrowers
It’s official. The Federal Housing Finance Agency (FHFA) unveiled a new, revamped government mortgage refinancing program Monday.
The initiative involves a series of rule changes to the Home Affordable Refinance Program (HARP) to allow more underwater homeowners to reduce their mortgage debt by taking advantage of today’s rock-bottom interest rates.
Mortgages backed by Fannie Mae and Freddie Mac, and originally sold to the GSEs on or before May 31, 2009 are eligible for the program.
Under the revised HARP guidelines, the 125 percent loan-to-value (LTV) ceiling has been eliminated. Previously, only borrowers who owed up to 25 percent more than their home was worth could participate in HARP. That limitation has now been removed. The program will continue to be available to borrowers with LTV ratios above 80 percent.
The new program enhancements address several other key aspects of HARP that industry participants say have restricted its impact, including eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers, as well as allowing mortgage insurers to automatically transfer coverage from the original loan to the new loan.
In addition, Fannie Mae and Freddie Mac have done away with the requirement for a new property appraisal where there is a reliable AVM (automated valuation model) estimate already provided by the GSEs, and they’ve agreed to waive certain representations and warranties on loans refinanced through the program.
Not only are loans eligible for HARP considered “seasoned loans,” but a refinance helps borrowers strengthen their household finances, reducing the risk they pose to the GSEs. Thus, FHFA feels reps and warranties are not necessary for some of these loans.
With Monday’s announcement, the end date for HARP has been extended from June 30, 2012 to December 31, 2013.
The GSEs will release program instructions to lenders by the middle of next month, and FHFA expects some lenders will be ready to accept applications by December 1.
Since HARP was rolled out in early 2009, approximately 1 million homeowners have refinanced their mortgage loans through the program. FHFA estimates that with the revised guidelines, another 1 million will be able to take advantage of the program. To qualify, borrowers must be current on their mortgage payments, but government officials believe by opening HARP up to more homeowners with higher thresholds of negative equity, it will help to prevent foreclosures by erasing the primary motivation behind strategic defaults.
Economists at the University of Chicago Booth School of Business estimate that roughly 35 percent of mortgage defaults are strategic. Numerous industry studies have found that homeowners who owe significantly more than their home is worth are more likely to throw in the towel and walk away from their mortgage debt even if they have the ability to continue making their payments.
“We anticipate that the package of improvements being made to HARP will reduce the Enterprises credit risk, bring greater stability to mortgage markets, and reduce foreclosure risks,” FHFA stated in its announcement Monday.
Fannie Mae and Freddie Mac also released statements in response to the announcement.
Michael J. Williams, Fannie Mae’s president and CEO, called the program a “welcome development.”
“By removing some of the impediments to refinance, lenders can more easily participate in the program allowing more eligible homeowners to take advantage of the low interest rates,” Williams stated.
Charles E. Haldeman, Jr., CEO of Freddie Mac said, “These changes mark another step on the road to recovery for the nation’s housing market.”