Are Short Sales Signaling Smarter Banks?

Some new data released this week by Zillow is revealing not because it gives provides evidence of a troubled housing market - nothing could surprise us there - but because it may be a sign that the mortgage banks are finally beginning to get it.

Zillow, the Seattle-based website that started out as a place to research house values and morphed into a real estate marketplace, published numbers showing that short sales now constitute 10 percent of the real estate market in some locations.

Short sales are those in which the mortgage lender agrees to take less than the actual payoff of the mortgage in order to facilitate the sale of a house when the owners are in financial trouble.  Historically lenders have been very reluctant to agree to short sales because of a conviction that they serve to lower property values, set a bad precedent, or because, by darn, nobody is going to get away with paying them less than they are owed.

Even as recently as a year ago lenders were not agreeing to short sales unless the owner had a firm offer to purchase and provided extensive documentation of his inability to pay the residual mortgage balance.  This was one reason that thousands of homeowners who owed far more to the bank than their homes were worth simply walked away.

Now Zillow reports that lenders are approving short sales in advance to entice potential buyers.  According to the author of the report, Katie Curnutte, PR Manager of Zillow, some for sale signs even say "Short Sale Approved by Lender"

Zillow compared recent real estate sales with the amounts of the matching original mortgages and concluded that 10.9 percent of all real estate transactions during 2008 were probably short sales. 

Zillow also found that this number varied by market. Lincoln, Nebraska topped the list with 14 percent of 2008 sales appearing to be short sales.  Three areas in California - San Jose, Santa Cruz, and Santa Rosa also ranked high in the highest incidence of these sales - near 12 percent while in Albany and Poughkeepsie, New York short sales represented 0.1 and 0.8 percent respectively.      

Ms. Curnutte expresses curiosity about the regional nature of the figures.  She comments that, while Albany and Poughkeepsie markets are fairly stable, some California areas which have been hit hard by the housing collapse also had low rates of short sales.  She mentions specifically that in Madera and El Centro California where home prices are down 30 and 23 percent respectively, short sales represented less than 4 percent of total sales.

We think that the short sales are probably as much a function of the pragmatism, flexibility, and/or location of the lenders as of the real estate market itself.

A local lender can see what is actually happening at ground level and will certainly have more flexibility to cut deals than the big banks or mega-servicers.  Some lenders employ absolutely inflexibility as a corporate policy, others are so overloaded it is difficult for them to respond effectively, and then there are those which have been much faster to adapt workout procedures to respond to the current mess.  Even a big lender/servicer may have very different rates of workouts, short sales, and completed foreclosures in an office serving a troubled area in California as in another office servicing a distressed part of Florida.  This may reflect the attitudes of managers, tolerance of bureaucracy, even the work ethic of the lender's employees.

It would be interesting to know if there are predominant lenders or servicers in those parts of the country which Zillow has identified as having exceptionally high or low rates of short sales.  It would be even more interesting - and this might be important enough for public policy to warrant a serious study - to determine what the various workout rates are for the banks and servicers in charge of doing them.