With more borrowers falling out of the Home Affordable Modification Program, short sales are finally gathering steam.
Short sales have skyrocketed in the past two months after overtaking sales of real estate owned (properties that had been repossessed) in January, suggesting that the government's Home Affordable Foreclosure Alternatives program kick-started the short-sale market even before going into effect April 5.
Roughly 28,000 REO sales were completed in March by seven of the top-10 mortgage servicers, nearly flat from 26,000 in February, according to data provided to American Banker by Equator LLC, a Los Angeles software firm. But 55,000 short sales were done in March, up from 29,500 in February, according to Equator. In a short sale, the borrower sells the home for less than is owed on the mortgage and the lender accepts a discounted payoff.
Christopher Saitta, Equator's chief executive, said it will take the market some time to absorb all the distressed properties, whether they are sold as REOs or in short sales. "I think it's going to take two to three years to get through everything the foreclosure moratoriums and the economy have created," Saitta said. "We're likely to see more short sales earlier in the process and servicers are going to have to deal with that volume."
Servicers use Equator's technology to communicate with asset managers, real estate agents and other vendors. Last month, Equator hired John Vella as its chief operating officer. He had been an executive vice president at GMAC Inc.'s Residential Capital LLC and was the president and CEO of EMC Mortgage Corp., a unit of Bear Stearns Cos., which is now a part of JPMorgan Chase & Co.
Mortgage bankers that resist when investors try to make them repurchase defective loans are getting penalized when selling new loans to the same buyers, an attorney says.
"Lenders are seeing bogus charges levied against them because they haven't forked over the money for buybacks," said Philip Stein, a partner at Bilzin Sumberg Baena Price & Axelrod LLP in Miami.
These "net funding" charges, which cut the overall price paid to a correspondent for a new loan, make up for some of the investor's loss on an older loan that is being disputed, Stein said.
Such tactics can put small lenders that need an outlet for their loans in a bind.
"Many banks claim they are owed money on buybacks but they have very flimsy reasons," Stein said.
For example, some lenders sold loans to IndyMac Bank, which in turn sold them to investors. IndyMac failed in July 2008; now the investors are going after the originators, claiming they breached representations and warranties by not documenting borrowers' incomes.
"IndyMac literally told lenders that for stated income loans, 'do not include the income of the borrower.' They didn't want that information," Stein said. "And now they're pushing the loans back even though [IndyMac] told the lender not to provide the information."