Elemental Wellness Financial Look: Fannie Mae Tests 'Short Sales' as Alternative to Foreclosures

By Nick Timiraos
9 January 2009
The Wall Street Journal


Fannie Mae is testing a new program to stave off foreclosures by preapproving "short sales" of homes, in which mortgage companies allow homeowners to sell houses for less than the value of existing loans, forgiving the difference.

As the number of homeowners in default on their mortgages began to rise several years ago, real-estate agents started touting short sales as a way for troubled borrowers to sell their homes quickly to potential buyers looking for bargains. Real-estate agents reasoned that banks and mortgage companies would go along with short sales, because they tended to lose less money in the transactions than if a home fell into foreclosure.

In reality, most short sales unraveled, because lenders, servicing firms and mortgage guarantors rejected the sales price agreed upon by the buyer and seller, or because it took the mortgage companies too long to approve the transactions and the deals fell through.

"Short sales have received such a bad reputation among real-estate agents that, as a portion of the overall mortgage market, they have gone down," said Tom Popik, a survey director for research firm Campbell Communications. "We hear a lot of people say, 'I'm tired of doing them. They've been a nightmare.'" A survey Campbell conducted in November of real-estate agents found that the average wait time to get an answer from a lender on a short sale stretched to 8.1 weeks, up from 4.5 weeks in a survey conducted earlier in 2008.

Fannie Mae wants to reduce that delay and spur sales by agreeing on a price for a home -- and the loss Fannie is willing to take on the sale -- even before a buyer has been found.

Two pilot projects, in Phoenix and Orlando, Fla., began at the end of December and will last for three months. The test run is limited to properties secured by a Fannie Mae mortgage and serviced by Countrywide Financial Corp., a subsidiary of Bank of America Corp. Only homes already listed at less than the unpaid balance on the mortgage are eligible for the pilot. So far, about 400 homes have qualified for preapproval between the two markets.

While mortgage holders still take a loss with a short sale, they don't have to take possession of the home and find a new buyer. An analysis by Clayton Holdings Inc., which tracks mortgage loans for investors, found that short sales result in average loan losses of about 19%, compared with an average loss of 40% for homes sold after foreclosure.

Fannie Mae officials say that if the pilot program is successful, it may be expanded to other lenders and regions. "Fannie Mae's goal is to make the short-sale process as fast as possible for homeowners in financial distress," in order to ensure a "graceful exit strategy for homeowners," said Kevin Brungardt, Fannie Mae's vice president for servicing management.

Both Phoenix and Orlando have been particularly hard hit by foreclosures. Home prices fell in the Phoenix region 33% last year through October, according to Standard & Poor's/Case-Shiller home-price index, the worst decline in the country. Some 29% of the state's borrowers had negative equity in August, and an additional 6% of borrowers were approaching negative equity, according to a report by First American CoreLogic, a data provider.

In the nation's hardest-hit housing markets, where many borrowers owe more than their homes are worth, short sales are often the only alternative to sales of foreclosed homes. "Values have come down so far that everybody here's upside-down," said Ron Leis, a Sacramento, Calif., real-estate broker who says about 80% of the properties he sells are bank-owned. "Until we can come up with approved sales, we're stuck selling foreclosures," he said.

But some real-estate agents say that Fannie's effort may be too little, too late, because prices are declining so quickly -- at a rate of almost 3% each month in Phoenix -- that prices may have fallen by the time a home is preapproved for a short sale.

"I don't know how you can determine a price today unless you also have a buyer," said Kevin Kauffman, a Phoenix real-estate agent who specializes in short sales and completed 65 such sales last year. He says a preapproval won't go far "in a market like this, where waiting one month costs you a couple percentage points."