Many market pundits claim lenders should focus on short sales rather than foreclosures. They contend short sales offer better capital recovery than foreclosures and they are less harmful to market pricing. This is not an accurate assessment.
First, not all foreclosures become REO. About a third of all foreclosures are purchased by third parties who either flip them or hold them as cashflow investments. Flippers generally improve the property and sell for full market value, so their activities don’t push prices lower. And obviously, cashflow investors don’t push prices lower because they don’t sell their properties.
Both short sales and REO resales require discounts to sell. REOs require a discount because lenders are loathe to spend any money fixing them up. Short sales require a discount because buyers won’t put up with the arduous process unless there is a reward for their patience. Sales prices of REOs or short sales do not differ much because both require discounts to sell (REOs -34% and short sales -21%). And since short sales and REO don’t differ much, and since both negatively impact prices, whether lenders choose to sell as short sales or as REO is irrelevant to the health of the market. Both short sales and REO are distressed sales.
By Claire Easley — From: BUILDER 2012, Posted on: May 17, 2012 12:03:00 PM
After months of ominous warnings that a second title wave of foreclosures was coming, the impending tsunami seems to have been downgraded to something more akin to a tropical storm, thanks in part to an increase in the use of short sales by some of the largest mortgage servicers.
Foreclosure filings hit the lowest level seen in nearly five years in April, down 5% from the previous month and down 14% year-over-year, according to data released today by RealtyTrac.
While there is still plenty of pain to be felt in many regional markets with backlogs to work through, “More and more, it’s looking like short sales are going to take the air out of that expected bubble in foreclosures we were thinking would happen this year,” said Daren Blomquist, vice president at RealtyTrac, on a call with Builder this week. “At the end of the day, foreclosure activity will be up slightly this year compared to 2011. We’ll still see increases in filings in local markets … but short sales are helping to siphon off a lot of the potential foreclosures that are out there.”
Banks tried to do more short sales in early 2010, but were unsuccessful in resolving more loans that way. Perhaps with more government bailout dollars to pay off second mortgage holders and with requirements for write offs with the mortgage settlement deal, lenders will be in the mood to approve more short sales.
That’s promising news for home prices, which have been pummeled by the onslaught of distressed sales in recent years.
As of January, the latest month for which RealtyTrac has pricing data available, the average price of a short sale was 21% lower than that of a non-distressed sale; meanwhile REOs averaged a 34% price drop compared to non-distressed prices.
If lenders have fewer REOs and begin approving more short sales, the discounts will likely reverse. Short sale discounts will go up, and REO discounts will lessen. There is no reason for short sales and REO to sell for different prices on comparable homes. In the past REOs have sold for deeper discounts merely because lenders were more motivated to liquidate properties they already owned. If they own fewer REOs, their motivation to liquidate will lessen, and with less motivation, they will hold out for higher prices.
The shift may be due in large measure to the deal struck between the states’ attorneys general and mortgage servicers. Among the five largest lenders involved in that settlement—Ally, Bank of America, Chase, Citi, and Wells Fargo—the ratio of REOs to short sales is less than 1.5 to 1. Other lenders are averaging more than 2.5 REOs for every short sale performed. “That to me is an indication that the lenders in the settlement are more motivated” to avoid the foreclosure process, Blomquist said. “Those lenders account for a huge percentage of the loans being serviced. That alone is going to impact the industry, because the way they do things will be repeated by others.”
The lenders in the settlement deal have to write off a large dollar amount through short sale, so they are shifting gears until they reach their write-down targets. This is the kind of politically motivated change that’s very difficult to forecast. If not for the settlement, lenders likely wouldn’t have changed gears.
The post 8.7 years to clear Orange County distressed inventory at stable liquidation rate, had some astute observers who took exception to my numbers because they said many of the REO I said were coming were going to be resolved as short sales. To that I say, “so what?” Both REO and short sales are distressed sales, and both negatively impact the market. Resolving bad loans through short sales does not help the market in any way. As evidenced by articles like the one above, many people don’t understand that basic fact.
Port Street Ponzis
In California if you can leverage yourself into an expensive home, you get prestige, comfort, and a whole lot of HELOC money. There was a time when neighborhoods like this were the exclusive domain of wealthy people, hence the prestige aspect of owning there. You couldn’t borrow your way into neighborhoods like this because no lender would make such a large loan. Then the housing bubble came and the posers invaded.
At first the truly wealthy didn’t mind because the posers drove up the value of their holdings. On paper, these already well off owners became very rich. Unfortunately, it was a Ponzi scheme built on borrowed money, and now that these Ponzis have imploded, lenders are avoiding foreclosing on them, and wealthy people share their neighborhoods with posers who don’t pay their mortgages.
- The former owner of today’s featured property — a realtor — paid $1,590,000 on 12/18/2002. The original mortgage records are not in my database.
- On 8/27/2004 she refinanced with a $1,495,000 Option ARM.
- On 6/10/2005 she obtained a $210,000 HELOC.
- On 8/5/2005 she obtained a $200,000 HELOC.
- On 11/6/2006 she refinanced with a $1,943,500 first mortgage and obtained a $299,000 HELOC.
- On 12/11/2006 she opened a $666,210 HELOC.
- Total property debt was $2,609,710 assuming she maxed out the HELOC.
- Total mortgage equity withdrawal exceeded $1,000,000.
- To sweeten the deal further, the lender allowed her to squat in this beautiful home for well over three years.
I’m not sure if I should be jealous or appalled. I think it’s a little of both. This woman’s fall from entitlement will be extreme. She was making great money as a transaction leech with a house that provided her a $1,000,000 in free money. I suspect times are not as good today.
Newport Beach Overview
Median home price is $1,084,000. Based on a rental parity value of $783,000, this market is over valued.
Monthly payment affordability has been worsening over the last 2 month(s). Momentum suggests unchanging affordability.
Resale prices on a $/SF basis increased to $505/SF to $538/SF.
Resale prices have been weak for 12 month(s). Price momentum suggests weak prices over the next three months.
Median rental rates increased $175 last month from $$3,108 to $$3,283.
Rents have been slowly rising for 12 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 1
$1,995,000 …….. Asking Price
$1,590,000 ………. Purchase Price
8/17/2002 ………. Purchase Date
$405,000 ………. Gross Gain (Loss)
($127,200) ………… Commissions and Costs at 8%
$277,800 ………. Net Gain (Loss)
25.5% ………. Gross Percent Change
17.5% ………. Net Percent Change
2.3% ………… Annual Appreciation
Cost of Home Ownership
$1,995,000 …….. Asking Price
$399,000 ………… 20% Down Conventional
4.25% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,596,000 …….. Mortgage
$408,508 ………. Income Requirement
$7,851 ………… Monthly Mortgage Payment
$1,729 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$499 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$474 ………… Homeowners Association Fees
$10,553 ………. Monthly Cash Outlays
($1,476) ………. Tax Savings
($2,199) ………. Equity Hidden in Payment
$610 ………….. Lost Income to Down Payment
$269 ………….. Maintenance and Replacement Reserves
$7,757 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$21,450 ………… Furnishing and Move In at 1% + $1,500
$21,450 ………… Closing Costs at 1% + $1,500
$15,960 ………… Interest Points
$399,000 ………… Down Payment
$457,860 ………. Total Cash Costs
$118,900 ………. Emergency Cash Reserves
$576,760 ………. Total Savings Needed
We're sorry, but we couldn't find MLS # L38873 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
4 bd / 3.5 ba
3,100 Sq. Ft.
23 JUPITER HILLS Dr
4 bd / 3.75 ba
3,277 Sq. Ft.
9 SINGLETREE Dr
3 bd / 2.5 ba
2,800 Sq. Ft.
2201 ALTA VISTA Dr
5 bd / 3 ba
3,447 Sq. Ft.
20 TURNBERRY Dr
5 bd / 5 ba
3,796 Sq. Ft.
907 CITRUS Pl
5 bd / 4.5 ba
3,627 Sq. Ft.
3 RUE BIARRITZ
3 bd / 2.5 ba
3,011 Sq. Ft.
19 BURNING TREE Rd
4 bd / 2.5 ba
4,000 Sq. Ft.
2924 CAROB St
4 bd / 3.75 ba
3,100 Sq. Ft.
1706 PORT SHEFFIELD Pl
6 bd / 4 ba
4,000 Sq. Ft.