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FHFA Second Quarter Financial Report Shows Short Sales Continue to Rise

- Saturday, September 11, 2010

Data released in the new Federal Housing Finance Agency’s second quarter report for 2010 show that, as home foreclosure starts are back on the rise, more homeowners are choosing to avoid foreclosure by undertaking a short sale of their homes. Short sales of homes increased by 26% over the previous quarter.

Number of short sales and deeds-in-lieu, by quarter

The second quarter of 2010 saw an increase of 12% in foreclosure starts from the previous quarter, to a total of nearly 275,100, and an increase of 15% in completed foreclosure sales and third party sales.

Homeowners who are struggling to meet mortgage payments and who want to avoid foreclosure may pursue one of two strategies:

Home retention actions involve negotiating with the lender to change the terms of the loan, e.g.:

- making the loan repayments more affordable for the borrower by changing interest rate or other loan terms (loan modification)
- coming up with alternative loan repayment plans, or
- temporarily suspending monthly payments for a defined period of time (forbearance plan).

Home forfeiture actions are when the homeowner voluntarily relinquishes the property, either through:

- a short sale (where the home is sold, with the lender’s permission, for a value less than what is owing on the loan, and the lender accepts a discounted repayment to relieve the homeowner of the secured loan), or
- a deed-in-lieu (where the lender transfers ownership of the property to the lender) in order to be relieved of the loan obligations.

Actions to prevent foreclosure, by quarter

Home retention actions - and in particular, loan modifications - have been the choice of many homeowners. However, the loan modification program has been slowing down. The FHFA report shows that there were less than half as many borrowers in a HAMP trial period at the end of this past quarter than there were at the beginning of the quarter. And figures for July, 2010, show that there were more cancellations than starts in the HAMP program.

The total number of participants in either the trial or permanent stage of the HAMP program has decreased by 27% over this quarter: from 584,000 to 427,000. This decline in participation is attributed by the FHFA report to new requirements to verify documentation at the beginning of the loan-modification process, and cancellations due to inadequate documentation or missed payments.

HAMP loan modification stats, by month

As less homeowners opt for loan modification plans or cancel from HAMP trials, an increasing number of them choose to go ahead with a short sale. For them, the disadvantage of selling their property at a loss is outweighed by the advantages of:

- relieving them of a mortgage they can no longer afford
- avoiding the uncertainty of committing to repay a loan, even if its terms have been modified, in the current unstable and unpredictable economic climate
- receiving significant discounts on monies owed to their lenders (typically in the tens to hundreds of thousands of dollars)
- preventing foreclosure, and the negative long-term effects that a foreclosure would have on a consumer’s credit rating.

The FHFA report indicates that short sales increased by 26% from the current quarter (29,375) over the previous quarter (23,379). This represents an increase in short sales of 250% compared to the same period one year ago, indicating that short sales have becoming an increasing action-of-choice for homeowners seeking to address negative equity and avoid foreclosure.

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