Are We Finally Ready to Streamline the Short Sale Process?

     Realtors, investors and those in the know have long advocated a streamlined approach to short sales, but this movement is only now gaining momentum.  Perhaps the industry just wasn’t ready for such innovations before now; perhaps it took time and repetition for the industry to become seasoned and suited to streamline the process. 

     Not too long ago it was Governor Brown’s passing of the Homeowner Bill of Rights which hit the news; presently it is the recent announcements from the Federal Housing Finance Agency [FHFA], with specific changes going into effect as soon as November 1, 2012.  Regardless how you slice it, it is clear that key market players are making applaud-worthy efforts to improve existing Loss Mitigation processes aimed to support the rebuilding process on both local and national levels.   

     The FHFA is the governing body of the government-sponsored entities of Fannie Mae and Freddie Mac, and announced on August 21 new short sale guidelines for Fannie and Freddie.  Fannie and Freddie existing shortsale programs will merge into one standard program.  Consolidating processes into a single, uniform program should certainly help [the industry] execute short sales more effectively and efficiently.  Additionally, Servicers will now be able to process and approve eligible short sales without having to first submit to Fannie and Freddie.  Fewer document requirements are being implemented as well for qualifying homeowners.  These innovations are hoped to have the combined effect of shortening the qualification process.

 ther highlights of this announcement include:

·         second lien holder contributions of up to $6,000 by Fannie and Freddie

·         Opportunities to short sell for current borrowers demonstrating hardship

·         Special treatment for military personnel

    Analysts believe that such innovations will make it easier for banks to quickly qualify eligible borrowers for a short sale.  As the FHFA Acting Director Edward J. DeMarco remarked, “These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities.”

An Analysis of the Low Unsold Housing Index

     The most recent real estate reports for California markets continue to identify low inventory as the stand-out characteristic.  Historically the turnover from spring to summer brings a seasonal surge of listing and sales activity.  Yet in 2012…. Not so much.  The California Association of Realtors recently reported that single family home sales [SFR] were up 8.5 % across the state from last year but down 8.6% from May levels.  C.A.R. Vice President and Chief Economist Leslie Appleton-Young attributes much of this downward month to month sales activity to the tightening of distressed and foreclosure units available for sale.  Most analysts share the view that this low seasonal inventory, coupled with high demand sustained by low interest rates and a strengthened job market, has concocted a seller’s market dominated by multiple offer situations and bidding wars which drive up home prices.  June median home prices substantiate this reasoning, as the reported figures for the third consecutive month were above the $300,000 mark, ending June at $320,540, its highest mark since December 2010.

    But just how low is inventory?  One of the best measurements of inventory and overall health of the housing market lies in the Unsold Housing Index, calculated by determining how many months it would take to sell homes currently on the market at the current rate of home sales.  The Unsold Index is simply calculated by dividing the available homes by the number of homes sold. A three month Inventory in the Unsold Index indicates that at the current rate of sales it will take three months to completely deplete the inventory, assuming that no new listings are generated.  A reported index of 7 is commonly regarded as a healthy market.  And with the current California Unsold Index at 3.5 months, there is no debate that we are currently experiencing a tightened housing market, especially when seasonal adjustments are factored into the equation.

     If we take the above study a step further, perhaps we can diagnose what type of sale is contributing most to this downward inventory trend?  As the below chart will indicate, pulled from the C.A.R. website, equity sales continue their year-to-year and month-to-month climb, while distressed sales, more specifically REOs, continue on a downward pace. 

Type of Sale	June 2011	May 2012	June 2012
Equity Sales	50.5%	56.0%	58.0%
Total Distressed Sales	49.5%	44.0%	42.0%
REOs	29.2%	22.6%	20.2%
Short Sales	20.0%	21.1%	21.4%
Other Distressed Sales (Not Specified)	0.2%	0.3%	0.4%
All Sales	100.0%	100.0%	100.0%

     With the average distressed sale fetching lesser purchase prices than equity sales, such a trend helps partly explain the current price increases.  With inventory levels so low, the next big question to ask ourselves, why this continued percentage drop in REOs share in the marketplace?  Are distressed homeowners finding solutions to keep their homes without having to put their properties up for sale to avoid foreclosure?  Are beneficiaries taking more time to both process foreclosures and to resell foreclosed homes?    

     Well, as statisticians love to say, “the numbers don’t lie”.  As the graph below illustrates, pulled from Foreclosureradar.com :

… both the average time to foreclose and the time it takes beneficiaries to resell their REOs have increased since the start of 2012.  Both trends can help explain why there has been a recent decline in REO sales and overall sales.   It’s certainly possible that lenders are extending these foreclosure-related processes to add fuel to the existing price increase trend.  But it could also be the extreme back-log of delinquent accounts and the limited resources lenders have to process all the homeowner inquires that is causing these lender delays.  My hunch… it’s a combination of both.  Regardless how you slice it, C.A.R. President LeFrancis Arnold explains that the decline in REO housing supply is “putting upward pressure on bank-owned home prices, with the median price of REO properties showing a double-digit year-over-year gain of 11 percent in June.”

A Close Look at Studio City Foreclosure Trends

As the summer wheels continue to churn forward, my focus intensifies on foreclosure trends in my local market here in Studio City, CA, home base for my real estate firm, Equitable Realty & Services.    Through the scope of my Economics Degree, I’m always looking for signs of growth and increased productivity, as the market continues to search for ways to heal itself.  Political innovations, like the recent passing of the California Homeowner Bill of Rights, or the Mortgage Forgiveness Debt Relief Act of 2007 [which I bring up now only because it is currently set to expire December 31, 2012], are also given their due attention for their immediate impact on the local and national recovery process.

For such real estate data research, I can always rely on the published works of RealtyTrac Inc., a leader of the online marketplace in collecting and aggregating foreclosure data worldwide since its inception in 1996.  I encourage anyone who shares my similar interests on these issues to visit RealtyTrac at www.realtytrac.com .  There you will find helpful statistics, even graph analytics like the caption below. 

Foreclosure Activity and 30-Year Interest Rate - Studio City, CA

As you can see, this graph shows a steady decline in foreclosure activity in Studio City Real Estate since September of last year, providing a much needed confidence boost to eager realtors, investors, and homeowners looking on.  Studies on both state and national levels show similar trends.  But does this contained study provide enough statistical evidence to show the prolonged real estate and economic downturn is behind us.  Asked differently, is the market trajectory truly on the path of recovery?   The answer may be right here on this very same graph. 

If you look at a historical graph of interest rates and recessions, you will nearly always observe recessions correspond with low rates.  Interest rates, as you know, can be regarded as the price of borrowing money.  Behaving similarly to normal commodities, pricing levels have direct correlation to a commodity’s demand.  Increased demand puts upward pressure on price, with the latter increasing until a new equilibrium is reached, and at a higher price.  This is Economics 101 people. 

The Federal Reserve continues to dive into their monetary policy arsenal, doing their part to keep both short-term and long-term rates low to encourage business, spending, and investment.  Fed Chairman Ben Bernake uphold the policy committee’s aim to maintain such measures until the end of 2014, at least for the time being.  From a housing perspective, the historically low rates will help awaken business and fight the foreclosure crisis head on. With the price of borrowing cheaper, target areas of first-time home buying, new construction, refinance and real estate investment will all receive a shot in the arm.  When normalcy in the market is restored, it will be strong enough to support interest rate increases. 

So, not until I see both the foreclosure trend downward and interest rates upward can I truly maintain that the economy has pulled through the worst of it.