Thursday, January 8, 2009

Fannie Mae tests short sale program

Tonight the WSJ reported that Fannie Mae is testing a new short sale program by preapproving the short sale price before an offer is made. This is a very significant development and would go a long way in reducing the time the housing crisis takes to ultimately finish. What is currently happening is a homeowner would put a house for sale on the market and wait for an offer not knowing whether the listing price would be approved or not for a short sale. Once an offer is made the servicers looks at the sellers hardship package relative to the offer and works with all the investors and the potential buyer to see if an agreement is reached on the offer on the table. The negotiations can take some time (8.1 weeks on average for the article) and ultimately come back that they won't accept the sale at the price in question. During the time the buyer could pull the offer and go elsewhere but because the wheel was set in motion the investors come up with a price they agree on and let the seller know that a short sale has been preapproved at a certain price.

These preapproved short sales can close very quickly, as fast a normal house or foreclosure. What Fannie is proposing to do is preapprove the short sale before an offer is made, turning the transaction into a normal real estate transaction for the buyer. The advantage to an investor of taking a short sale in a down market is that it reduces exposure to the downward market. Instead of waiting 120+ days to foreclose plus normal marketing time in a depreciating market the investor gets their money out sooner and will ultimately get more as a result. As agents start to realize that short sales are closing quickly and with little hassle they will be much more widely marketed instead of being shunned by some agents and buyers as being too difficult and uncertain to deal with. This recognition that it is better to get ahead of the market and replace weak borrowers with strong borrowers at market prices will reduce the number of foreclosures but rationalize the market sooner rather than later.

From the article:
While mortgage holders still take a loss with a short sale, they don't have to take possession of the home and find a new buyer. An analysis by Clayton Holdings Inc., which tracks mortgage loans for investors, found that short sales result in average loan losses of about 19%, compared with an average loss of 40% for homes sold after foreclosure.

If this program catches on it will be a very positive thing for reducing the duration of the housing bust.

7 comments:

Noz said...

While this may seem like a good idea for loaded and money-hungry investors, it does nothing IMO to help legitimate buyers who really want a home to live in.

This will hinder market correction IMO. It will not allow the natural course of things to happen and in a way, it is what was happening before but just renamed and repackaged.

Effective Demand said...

I really disagree Noz. This puts more inventory on the market sooner instead of waiting for many months to foreclose they put the short sales on the market at set it at market price.

If you treat a short sale as a foreclosure, by that I mean you use the pricing procedures you use for a foreclosure for short sale and preapprove the market price, it will give a much greater inventory of motivated inventory for a purchaser. Just like the concept of effective demand (demand backed up by the ability to purchase) short sales were seen as ineffective supply (supply not backed by ability to deliver the goods). This will increase effective supply and increase competition. It will drive prices lower faster and get this mess over with sooner.

Noz said...

I guess if you look at it that way, I can see your point.

What worries me is that there ALOT of vultures and predators on the side lines waiting for access to the market quickly.

People like myself who are not interested in investment properties will get potentially screwed again.

Do you see what I mean?

Effective Demand said...

I was confused about you worrying about investors in this plan. I think you are mistaking the word investors in my post for investors buying homes. The investor in this context is the person who owns the mortgage (in this case Fannie) and is selling it at a loss.

This plan merely means that Fannie agrees up front on the loss it will take before the house ever gets to market helping ensure a timely sale.

Anonymous said...

I have sold over 200 homes for Fannie in Arizona. I have given up a home early in the game. The bank would not take my short sale, but sold for $100k less a week later as foreclosure. The short sale makes sense. It saves the bank money, no doubt. It will keep vlaues a little higher. BUT...it's a dynamic equation. make short sales easier and you get more of them. I lost income and know the pain. There must be pain in the equation or the borrowers just give up. If the government keeps picking winners and losers it will get worse. Using tax dollars to make it easier for Fannie borrowers to short sale may make others just throw in the towel. Make something attractive and you'll get more of it!

Noz said...

I'd like to know who these clowns in the banks are who make these decisions. Seriously...if only they were more transparent with their dealings, it may make more sense....but as it stands, I see nothing but shady practices going on.

Noz said...

ED:

I see what you are saying. I think my worry is that individuals with ALOT of money will essentially not allow people like us to fairly enter the game. Whiel the "investor" you speak of is a different entity and is taking a loss, the other investor picking up the property is what I'm talking about.

Imagine a $100K Ferrari being sold for $60K...bargain right? Sure it is for the ones in the sidelines with all the cash. But for me, a working joe, it's still out of reach. Short sales still do not address the massive reduction on home prices that need to occur. Homes are still well out of reach for most people...$600K-700K for a 1500 sq ft home in Glendale....that's just crazy.