Daniel Indiviglio at the The Atlantic recently asked if HAMP should be "put out of its misery." These are the types of questions, warts and all, that need asking in this industry.
Considering that HousingWire first broke the news of the government-supported short sale program, the Home Affordable Foreclosure Alternatives program, I originally felt that this question should naturally be expanded to include HAFA. After some further thought, I wondered if 2010 was really turning out to be the Year of the Short Sale as promised. And thinking even larger, how are short sales, now a major focus in mortgage finance, impacting housing recovery?
It is a hard target to hit, granted, when eight parties need to reach an agreement. And when it comes to the fallibility of the short sale structuring, the industry is not in total concert. JK Huey, a veep at Wells Fargo, says borrower finances often cause short sales to fall through. Greg Hebner, the president of loss-mitigation firm MOS Group says its more of an unwillingness on the part of all parties involved to proceed expeditiously to closing.
These issues nonewithstanding, halfway through 2010, it's time to examine the role of short sales on the so-called recovery — government help or not — by looking at some hard facts.
Shifting the focus from REOs to short sales arguably caused an increase in prices during an already troubled market. For buyers, foreclosed assets are cheaper to purchase traditionally, and short sales are more home and homeowner-friendly. Nonetheless, by promoting short sales, HAFA undoubtedly pushed all distressed asset prices up higher, perhaps to levels that even compete with "healthier" houses.
However, reporting that house prices are rising may lead some to infer that they are in the midst of a macro-economic recovery that is not actually happening in certain areas, according to a research report from Morgan Stanley.
Authored by Securitized Credit analysts Oliver Chang, James Egan and Vishwanath Tirupattur, the recent Housing Market Insight piece compares the MSAs of Los Angeles and Miami. In comparing these "apples to apples" markets, they find short sales, are meant to become the "preferred method of liquidation," and that "recovery values should benefit," especially in investor-heavy Los Angeles.
I'll be sure to include a more comprehensive write-up in the August issue of HousingWire magazine. But, in the meantime, the report concludes after deeper examination that short sale prices are stabilizing, whilst prices for other liquidation properties are rising, "potentially because the drop-off in sales has created a shortage of highly distressed supply, causing those bids to rise." At least, that's the case in Los Angeles.
Florida is, on the other hand, a full–recourse and judicial state, Morgan Stanley says. California can keep the wheels spinning on the shadow inventory, because its easier to get repossession one way or another.
Of course, there are no official short sale statistics for MSAs, (the Treasury Department will release HAFA numbers later this year, as will RealtyTrac with short sales) though DataQuick reports that about one-third of total sales in LA and Miami alone are short sales. But this is only up from 25 to 27% of the total sales a year ago. If nothing changes in the next few months, can it still be considered the Year of the Short Sale?
A few percentage points of gain in market share is hardly sufficient to claim that this product is getting the support it needs from the market, especially in places such as Miami where the inability to turn over shadow inventory is evidenced by the RealtyTrac numbers.
So while the nation may be on a marginal recovery, it's important to remember that those numbers are national statistics. That data does not immediately represent the markets hit harder by the economic downturn, such as Miami.
Prices for distressed assets may have gone up, but it won’t be for long. Miami is facing a supply glut, no relief in negative equity in sight, and large pools of delinquent mortgages. And the focus remains fixated on short sales?
In this regard, short sales may help save the credit score of the borrower and help keep the property intact, but we have to ask ourselves if this concession is really worth the price mortgage finance will pay?
Write to Jacob Gaffney.