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Hawaii Short Sales Assist Bank Liquidation Losses

The reputation of short sales is that they “are not short,” meaning they take a long time to successfully complete. Conversations about short sales often revolved about how to make the process more efficient—meaning shorter, since on average it lasted anywhere from 60 to 90 days, though some short sales go on for over a year.

That worry may be becoming a thing of the past. According to a Moody’s report, compared to foreclosures, short sales are now a much “shorter wait” that helps loan servicers to mitigate the high loss severity associated with liquidating delinquent loans.

Moody’s reports the incidence of liquidations through short sales “has increased dramatically” over the past two years from around 8% of all liquidations in August 2009 to 25% by midyear 2011.

The primary reason why lenders, servicers, and borrowers prefer a short sale is loss mitigation. It results from the dual effect of technology and industry efforts that have helped reduce the short sale processing time and the foreclosure alternative.

The increasing foreclosure backlog, longer foreclosure processing time lines that may exceed months and even years, while legal costs accrue, are a strong driver. Especially in Hawaii, where the foreclosure pipeline is destined to become further clogged from the effects of Hawaii’s Act 48. “Servicers are increasingly opting to bypass the foreclosure process,” Moody’s said because they can liquidate distressed properties faster and also reduce some of their losses.

The report also shows the average loss severity on liquidated loans remained “fairly constant” over the past year, at least in part due to “a rising number of short sales through liquidations” that help reduce default loan losses.

In the past year, loss severity on liquidated loans averaged about 60% of the outstanding balance of the defaulted loan. As a result, currently loss severities are elevated, but stable. Moody’s finds that one of the factors that pushed the loss severity up was the longer time line between when the borrower defaults, or is 60 days or more past due on the mortgage, and the time when the property is liquidated keeps increasing.

If in January 2009 the average liquidated time line was at 15 months, by June of this year it increased to about 24 months. Data shows the increase has been consistent throughout 2010 and into this year. By January 2011 the average liquidation time line reached about 22 months, up from 17 months in January 2010. Similarly, by mid-year 2010 the time line extended to 19 months and further up to 22 months in June this year.

Another well-publicized reason is “the glut of foreclosed properties along with attorney general proceedings and litigation” that slowed down the foreclosure process in many states. In Hawaii, some banks are recalling non-judicial foreclosures where the final affidavit had not been recorded prior to the May 5th, 2011 enactment. This means, the bank may go through the entire foreclosure again, adding further delay and loss severity for the lender.

As a result, residential mortgage-backed securities trusts have faced higher expenses in advanced principal and interest payments on delinquent loans, tax obligations, and property maintenance costs—which in turn, increase losses when the loan is liquidated.

If you are pursuing a purchase of a distressed property that is a short sale in Hawaii, it’s a valuable asset to work with a buyer’s agent who thoroughly understands the short sale process and who can properly attenuate your expectations to avoid disappointment while going through the process. I’m here to assist both buyers and sellers in the short sale process.

If a homeowner is not able to modify their mortgage, a short sale is a much more dignified exit than going through a judicial foreclosure. Remember, in the judicial proceeding the lien holder has a right to pursue a deficiency judgment. Got further questions, or thoughts on the matter? Please let me know…

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