REO sales hit their highest point in January of 2009, but short sales are just now reaching their peak, said Matt Heidenreiter, senior director of outsourcing solutions at CoreLogic.

"Shorts sales are playing a much more significant role. Michigan and Nevada are the leading states here, partially due to a lot of institutional investments," Heidenreiter said.

Heidenreiter discussed market trends for short sales and REOs in a session at the SourceMedia 7th Annual Mortgage Servicing Conference in Dallas.

"Institutional Investors have been targeting specific markets, leading to notable increases in REO prices. The largest increases in REO price appreciation is being driven by institutional investments, which is driving down supply and increases demand," Heidenreiter said.

He expanded saying a majority of states experienced increases in short sales year over year, mostly because they are taking market share from REOs.

Despite foreclosures lessening, the originations market improving and home prices rising, delinquencies still persist in portions of the market.

"There are 9 states that have greater then 7% delinquency. There are still underlying issues there, which will equal more foreclosures and more distressed sales in the future." Heidenreiter explained.

He added, "There are not as many as in the past, but we need to understand that there are still issues there and this problem is not solved yet."

The market still faces challenges, including shrinking REO inventories, rapidly changing values, subordinate liens and increasing fraud risk.

"There are a lot of constraints and lot of challenges that servicers are working through, but it pays to equip yourself as best as possible to handle the market," Heidenreiter said.

In order to overcome the challenges, Heidenreiter suggests frequent valuations and calibrations, understanding of the market at the zip code level, consolidation of vendors and identifying subordinate liens.