Year-end data from CoreLogic shows home prices fell by 4.7 percent over 2011. It marks the fifth consecutive year the company has recorded an annual decline in residential property values.
CoreLogic performed a separate calculation, which illustrates just how big an impact distressed sales are having on home prices. The company excluded all short sale and REO transactions from 2011 and found that when the distress factor is taken out, prices declined by just 0.9 percent.
Commenting on the company’s latest results, Mark Fleming, CoreLogic’s chief economist said, “While overall prices declined by almost 5 percent in 2011, non-distressed prices showed only a small decrease. Until distressed sales in the market recede, we will see continued downward pressure on prices.”
Here again, the company illustrated the weight of distressed sales, noting that when short sale and REO transactions are factored out, the home price decline from April 2006 through December 2011 narrows to 24.0 percent.
The term “short sales” is used to describe a situation in which a homeowner is at risk of defaulting on their loan, and the lender agrees to sell the property below the original appraisal price in order to avoid foreclosure. Most lenders do not readily agree to short sales, although exceptional circumstances such as a homeowner losing his/her job or the death of a wage-earning spouse may make some of them more open to doing so.
If a property is sold as a short sale, the lender recoups at least a portion of the original loan amount, the homeowner avoids the stress and stigma of foreclosure, and the new homebuyer gets a property below its original appraised price. If a short sale doesn’t work, then the property usually goes into foreclosure.
Short sales may be an emerging trend as the rate of foreclosure is rising dramatically across the nation.
The credit of homeowners may be impacted after a short sale, but it all depends on how the lender reports the outcome. Some lenders report a partial loan repayment as full payment of the debt due, which does not adversely impact the credit of the borrowers. Other lenders report the sale as “settled,” which adversely and significantly impacts the borrower’s credit. The other problem is that the portion of the loan amount forgiven by the lender may actually count as taxable income by the IRS.
In summary, a successful short sale has some potential positive benefits (e.g., homeowners avoid foreclosure, lenders recoup at least a portion of the loan amount, new homebuyers gets a property at below the original appraisal price, etc), but there are also many negative consequences.
Some of these potential negative consequences include: the negative impact on borrower’s credit, negative impact on the value of other similar homes in the neighborhood, and that the amount forgiven by the lender may be taxable event.
Homeowners having difficulty making their monthly mortgage payment may benefit from talking to a real estate agent who is experienced in short sales.
There are several differences between a short sale and a foreclosure. Homeowners who find they are having difficulty meeting their monthly mortgage payments should be careful to understand these differences before taking action. Discussing the options with their mortgage company, scheduling a meeting with a real estate consultant, and learning what potential taxable and credit report consequences may be, are all important facets to understand before making a decision. Let’s first look at the definition of these terms:
Short Sale – when a lender agrees to accept less than what a homeowner owes on a mortgage. In a short sale the home is listed by the owner and sold.
Foreclosure – when the homeowner stops making monthly mortgage payments and the bank takes legal action against the homeowner and the deed of the home returns to the lender. In a foreclosure, the deed is transferred to the bank in a legal action.
Now that we know the difference, let’s take a look at the specifics of the short sale and a foreclosure:
A short sale provides the home owner the opportunity to put the home on the market at or near market value even if more than the market value is owed on the property. When the home is offered for sale, it must be advertised and marketed with verbiage such as “short sale” and “all contracts must be approved by bank.” This informs potential buyers that the seller cannot accept any offer without approval from the mortgage holder. In some cases, the bank will wait until several offers have been received before making a decision as to which one, if any, to accept. The reason for this is so the bank can be sure to accept the highest offer, thereby receiving the most money back on their initial investment.
The reason a bank will even consider a short sale is because often times they will retain more of the money owed them as opposed to going through a costly foreclosure. The foreclosure procedure is expensive for banks as they include attorney fees, court fees, realtor fees, and tax expenses. Often it is simply more cost effective for them to accept the short sale.
Homeowners who are considering either of these options should also consult a real estate professional, a tax specialist, and perhaps a tax attorney. There are real estate professionals who specialize in short sales. They can provide additional information, such as the current market value of the home, the potential for it to sell at a specific price, and how long it will take to receive an offer. They will also be able to manage the short sale transaction, assisting the homeowner with forms, communication and anything else required of the bank. In addition, a tax specialist or tax attorney will be able to provide advice on any potential taxable consequences the homeowner may be responsible for in either a short sale or a foreclosure.
When determining what is best for a particular situation, short sale vs foreclosure, consult the professionals, discuss options with the mortgage holder, and understand what it will take to be successful in either case.
One of the reasons banks favor short sales over foreclosures is that lenders are taking too long to repossess a home.
According to RealtyTrac, a firm that monitors the foreclosure market, homes in the U.S. spent an average of 318 days in some stage of foreclosure before a bank formally regained ownership during the second quarter of 2011. This marks an increase over last year when foreclosures were processed on average in 277 days.
To put this in context, RealtyTrac’s data from the second quarter of 2007—the year preceding the housing crisis—indicate that back then, a foreclosure was completed 154 days after the initial notice was filed by a lender.
So what has doubled the time it takes for a foreclosure to be processed?
The sheer volume of properties entering foreclosure is a huge factor, according to Daren Blomquist, marketing communications manager at RealtyTrac. But the process is also impeded by changes to many states’ laws.
“There are many programs being instituted by state and local governments that help the homeowner prevent foreclosure,” Blomquist says. He explains that many municipalities require lenders to provide mediation before they can repossess the home, which “adds 30, 60, even 90 days to the process.”
Also throwing a wrench into the procedure is the Home Affordability Modification Program, which doesn’t require lenders to let a homeowner refinance his or her mortgage on a distressed property, but gives financial institutions monetary incentives to do so. Such incentives lead many banks and lenders to try to work out a loan modification for the home before it’s repossessed, Blomquist says.
Finally, you can’t talk about the foreclosure market without addressing the robo-signing controversy which led to a temporary halt to foreclosures in October 2010, when lawmakers asserted banks were not following proper protocol before signing off on a foreclosed home. While proceedings resumed about a month after the initial outcry, the scrutiny did not die down. Just this month, county officials in three states called for for hearings and further investigation after alleging lenders were still illegally signing off on homes they did not legally have claim to.
Blomquist explains that while the controversy did not significantly change the legal proceedings involved in the foreclosure process, it did make banks slam the brakes.
“They’re scrambling to make sure that the paperwork is completed correctly because they are under such scrutiny,” he says.
An analysis of home prices through the end of February by CoreLogic shows a year-over-year decline of 6.7 percent when distressed properties – REO and pre-foreclosure short sales – are included in the numbers.
Take out the distressed factor, and the company says home prices are “showing signs of stability,” down just 0.1 percent from a year ago.
February’s 6.7 percent drop marked the seventh straight month that CoreLogic has recorded a decline in its national home price index, counting both distressed and non-distressed properties.
“When you remove distressed properties from the equation, we’re seeing a significantly reduced pace of depreciation and greater stability in many markets,” said Mark Fleming, chief economist with CoreLogic. “Price declines are increasingly isolated to the distressed segment of the market, mostly in the form of REO sales, as the stock of foreclosures is slowly cleared.”
A separate report released by Clear Capital also points to the impact of distressed property sales on home price trends.
Clear Capital’s data extends through the end of March, and the company says home prices in the western part of the country, where distressed homes account for some 40 percent of total sales, are continuing to steadily decline and have now fallen to a new, double-dip low for this cycle.