Are Foreclosures on the Decline?

The latest statistics suggest that foreclosures are on the decline and short sales are on the rise. According to research from Moody’s Investors Service, in August 2009, short sales accounted for 8% of bank distressed property sales. As of mid 2011, short sales have jumped to more than 25%.  Meanwhile, the time it took for a borrower to go to foreclosure grew from an average 14 months in early 2009 to 24 months in mid 2011.


Why are short sales on the rise and foreclosures on the decline?

  1. Foreclosing Has Become a Challenge: Banks began stopping the foreclosure process in October 2010 in order to correct forged documents and mishandled foreclosure paperwork as part of the robo-signing scandal. Since then, new regulations from federal agencies and still ongoing negotiations between the state Attorney Generals have made foreclosing on property difficult.
  2. Short Sales Save Banks Money: Banks saved an average of 10% by opting to sell through a short sale over taking the property to foreclosure. Factors such as shorter time frames, reduced legal costs and foreclosure expenses as well as short sale buyers paying more than foreclosure buyers all contributed to the savings.

Short sales are still not a quick sale process however. The average time to complete a short sale transaction remains around 12 months. But for banks, this is far better than the alternative.

For borrowers, short sales can be a terrific alternative to foreclosure. The damage to a borrower’s FICO credit score is far less with a short sale (50 to 200 point drop) compared to a foreclosure (as much as 400 point plunge.) Borrowers can usually buy a new home within 1 to 2 years after a short sale whereas it can be a 5 to 6 year purchasing moratorium after a foreclosure. Plus, many borrowers claim that knowing that they will be selling their property through a short sale is far less stressful than the uncertainty of letting it go to foreclosure. (Although some borrowers would disagree and have opted to live for free as long as they can, trading the uncertainty of foreclosure with the money saving technique of not paying their mortgage.)

What do you think about all this?

Is HAFA Helping Short Sales?

Is the Treasury Department’s Home Affordable Foreclosure Alternatives (HAFA) program helping short sales? It was introduced to help borrowers who couldn’t qualify for the Home Affordable Modification Program (HEMP) complete a short sale (as well as expedite the process…which is an oxymoron in and of itself; the government helping private enterprise be more efficient, ha!).

Now, after 15 months, the $4.1 Billion program has disbursed $9.5 million and accounted for only 8,541 short sales. To put that in perspective, during that same time frame, nearly 500,000 short sales were completed across the country. Meaning, a whooping 0.01% of short sales were completed through the HAFA program.

Why so few HAFA short sales?[like-lock]

  1. Lender Lack of Participation: Lenders are not allowed to collect on loan balances when short sales are handled through the HAFA program.
  2. Borrower Lack of Participation: In order to qualify, borrowers must have lived in their home for the past 12 months (no investment properties), have documented and qualifying financial hardship (no strategic defaults), a first mortgage less than $729,750 obtained before January 1, 2009 (sorry California) as well as a host of other requirements.

Ironically, both Lenders and Borrowers stand to gain financially from HAFA short sales. Lenders receive $1,500 for participation in the program and borrowers can receive up to $3,000. A testament to it’s effectiveness…it’s having trouble paying people to participate!

The program is due to expire at the end of next year. Director of policy Laurie Maggiano says the “complex machine” of HAFA will take time to change, but that change is finally, “beginning to happen”.

What do you think?

Is this a good use of our tax dollars? Paying $4,500 for each completed short sale transaction?

Does it need policy reform, or should it be canceled all together?

Is HAFA helping with short sales?[/like-lock]