Short sales, an alternative to foreclosure that poses relatively less overall severity, are artificially boosted by mandatory and voluntary foreclosure prevention efforts that prevent mortgages from entering real estate owned (REO) status, according to a securitization research note by Barclays Capital (BarCap). Short sales pose benefits to both borrowers and lenders where foreclosure is the alternative. A short sale tends to cost the lender less than foreclosure and it spares the borrower the negative credit score implications. As federally-funded modifications made through the Home Affordable Modification Program (HAMP) grow in frequency and lenders are expected to hold off on foreclosure proceedings, the REO pipeline shrunk, according to BarCap researchers. The foreclosure prevention efforts have had the effect of "artificially" boosting short sales. "The artificial constraints to foreclosure auctions have resulted in a reduction in REO stock," BarCap said. "As a result, the net volume of REO liquidations has also dropped. As short sales are not affected by moratoria, their rate held up and their overall share in distressed sales increased. It has now risen more than 10 points from the lows to about 35% of overall liquidations. It remains to be seen if this increase will sustain itself once the large number of loans sitting in foreclosure are finally released into REO." BarCap researchers pointed to the difference in severity seem in foreclosure and short sale scenarios as one of the drivers behind servicers choosing short sales. Servicers that pursue foreclosure on non-performing loans held within securitization have to make principal and interest advances until the loan's liquidation, BarCap said. If the asset declines in value during the liquidation timeline and it neighbors other REOs, the final selling price will likely come in far below the current broker price opinion (BPO), which leads to high severity. Short sales, on the other hand, pose a shorter timeline during which fewer principal and interest advances are needed. The asset has less time to depreciate, and borrowers have a strong incentive to maintain the property in order to sell it, BarCap said. The idea is that a better-maintained house attracts stronger bids, reducing overall severity in comparison with the REO liquidation scenario. Write to Diana Golobay.