Fitch Ratings believes the trend toward more short sales of distressed residential real estate loans in the U.S. is gaining momentum.
The Federal Housing Finance Agency's (FHFA) recent announcement government-sponsored enterprises (GSEs) will implement rules to expedite short sales should further drive activity. Expanded use of short sales could be positive for RMBS trusts, as this strategy could improve and shorten liquidations and lower loss severities.
On Tuesday, Lender Processing Services Inc. announced that the number of short sales exceeded the number of foreclosures for the first time in January. Fitch expects the increase in short sales to continue because of the potential benefits afforded to both lenders and borrowers. Some borrowers may prefer short sales because, though they cannot stay in the property, they often walk away with cash incentives from lenders and healthier credit reports unmarred by foreclosure.
For lenders, short sales provide a more efficient and cheaper alternative to the increasingly lengthy and costly foreclosure process. Short sales on non-agency RMBS are currently getting completed 20 months after the last payment made on the loan, approximately 10 months less than the average time to foreclose. Shorter timelines reduce lenders' carrying costs (i.e. accrued loan interest and property taxes, insurance, and maintenance) and eliminate most of the legal expenses associated with foreclosure and liquidation. As a result, loss severities tend to be considerably lower.
Historically, for loans with similar attributes, short sales have severities 10%-15% less than REO sales. As the proportion of short sales increases, we expect average loss severities to improve further. The FHFA's and GSEs' development of strategies to facilitate short sales, deeds-in-lieu, and deeds-for-lease beginning this June, which include the requirement for final decisions on short sales to be made within 60 calendar days, is likely to speed up this process.
Fitch also expects servicers to apply these practices to non-agency mortgages. For this reason, the agency views this as a positive development that could have a favorable impact on U.S. RMBS. Benefits include shorter liquidation timelines and improved loss severities, as well as another alternative that can be helpful in clearing the overhang of distressed inventory that continues to weigh on home prices. (Caryn Trokie, New York Ratings Unit)
