Fannie Mae plans to roll out a new program in the next few months to encourage short sales of delinquent borrowers' homes, a move that shows mortgage investors may be willing to make further concessions as housing prices fall and the inventory of foreclosed properties continues to grow.
As the holder of credit risk, Fannie take losses on homes that sell for less than what is owed on the mortgage, but generally the loss is not as big as it would be if the home went into foreclosure.
Many loan servicers and some brokers of "real estate owned" — properties that have been repossessed by a lender — say the number of short sales has increased significantly in the past few months, largely because more foreclosed homes have flooded the market.
Jason Allnut, a vice president for credit loss management in Fannie's Dallas office, said the government-sponsored enterprise is looking at ways to persuade servicers and REO brokers to do short sales while streamlining the process. "We want to incentivize the borrower with a program of preapproved short sales," Mr. Allnut said Monday at a conference in Indian Wells, Calif., sponsored by REOMAC, a trade group. That statement drew applause from the audience of about 1,700 default servicing professionals.
Many REO brokers complained that servicers typically cut the broker commissions on short sales, compared with a 4% to 5% fee on foreclosure sales. But Mr. Allnut said: "Fannie is telling servicers not to cut broker commissions."
Eli Tene, the president of I Short Sale Inc., a Woodland Hills, Calif., advisory firm, said it currently takes three to nine months to complete a short sale. Many loan servicers have held up the short-sale process by requiring approval from both the first and second mortgage holders, or a majority or three-fourths approval from investors in a pool of loans — "even on one short sale," he said.
By doing so, "they kill the process," Mr. Tene said. "What are the chances of holding on to a buyer for three or four months?"
Kevin Kanouff, the president of the fixed-income services unit of Clayton Holdings Inc., a Shelton, Conn., due diligence, surveillance, and loan servicing company, said short sales used to be an "afterthought" for banks but are increasingly seen as a practical alternative to foreclosure.
Clayton has noticed "a significant increase in the number of short-sale liquidations in the past year" by clients, because servicers are getting more borrower requests to effect such sales, he said. Second liens that have negative equity positions are typically getting $1,000 to $3,000 from short sales after the senior liens are paid off, he said.
Still, the difficulty for homebuyers to get financing in the current market and inadequate staffing of loss-mitigation departments are the most common reasons short sales fail to get approved, he said.
Servicers must reconcile the discrepancy between the original appraised value of a home and the updated "interior" value to determine the short-sale price, Mr. Kanouff said. "You calculate what you think you would lose on the sale price and what you would lose on a foreclosure, and weigh that against what a borrower can get refinanced at," he said.
Mr. Tene said his company is seeing a 20% to 30% increase in the number of borrowers who want to sell their homes in a short sale. He found that banks are penalizing borrowers who may be current on their mortgage but want a short sale and can prove some form of hardship. One-third of I Short Sale's 1,800 short-sale requests are from borrowers who have never stopped making their mortgage payments, Mr. Tene said.
A nationwide survey of real estate agents conducted last month by Campbell Communications Inc. of Washington found that 20% of all completed home sales in the fourth quarter were short sales or preforeclosure sales. The survey, which was published this month in the newsletter Inside Mortgage Finance, found that about two-thirds of pre-foreclosure and short sales are initiated by homeowners, the rest by servicers. In all, the real estate agents surveyed said about one-third of borrowers signed short and pre-foreclosure sale deals that fell through; the most common reasons were home inspections and property damage, a refusal by sellers to sign "deficiency notes," and sellers' inability to pay closing costs.
In February, Freddie Mac expanded a short-sale program to include more loans with a higher likelihood of loss, said Brad German, a spokesman for the GSE. The program lets servicers submit short sales with few documents from the borrower. Late last year, Freddie authorized its Tier One servicers — those that have shown "superior performance" — to accept short sales at bigger discounts and to pay out more to junior lien holders, Mr. German said. As a result of these changes, short-sale approvals nearly doubled last quarter from the previous quarter, and closings of such sales increased by more than half, he said.
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