Lender Losses Mount From Short Sales, Topping $310 Million in 2010

Lender Losses Mount From Short Sales, Topping $310 Million in 2010

Residential News » Residential Real Estate Edition | By Michael Gerrity | August 10, 2010 2:00 PM ET

According to CoreLogic's (NYSE: CLGX) latest 2010 Short Sales Research Study, lender loss is now over $300 million annually with over half of all short sales occurring in California, Florida, Texas and Arizona. Risk of unnecessary losses is occurring in one in every 53 short sale transactions. The average amount of unnecessary loss is $41,000 per short sale transaction.

"A jobless economic recovery and weak home prices are fueling short sales volume," stated Craig Focardi, senior research director, consumer lending at The TowerGroup. "In many instances, government-sponsored or private short sale programs are a preferable alternative to foreclosure. However, important aspects of the short sale transaction are disclosure of all potential buyers to the seller and accurate home price comparables. The long duration of mortgage defaults and potential loss upon home sale mandates automation and outsourcing of technology to reduce loss and risk for lenders."

"By definition, short sales constitute a financial loss to lenders but will continue to be a necessary part of the mortgage industry as it seeks stabilization. The primary objective for lenders is to eliminate unnecessary loss," stated Tim Grace, senior vice president of Fraud Analytics, CoreLogic. "The best way to mitigate fraud risk and unnecessary loss is through a collaborative effort where lenders collectively share pre-closing and post-closing information. Lenders in the CoreLogic Mortgage Fraud Consortium will benefit greatly from sharing knowledge of concurrent transactions pending on short sale properties in real time."

The results are derived from CoreLogic's examination of a representative data sample of single family residence (SFR) short sale transactions from the past two years. The CoreLogic transaction data used for the study represents 98 percent of real estate transactions and 85 percent of mortgage financing details. This large collection of historic and current data gives CoreLogic the ability to analyze segments of transactions, such as short sales, with tremendous precision.

CoreLogic 2010 Short Sale Research Study Highlights

  • The number of short sales in the market has more than tripled since 2008 with the estimated annual volume at 400,000. Multiple variables indicate short sales will continue to be a frequent and important part of the mortgage industry.
  • Over half (55.8 percent) of all short sales occur in just four states (California, Florida, Texas, and Arizona).
  • Approximately four percent of short sales have a subsequent resale within 18 months.
  • Investor driven short sales are not inherently bad. Investors provide the industry with necessary liquidity.
  • Short sale transactions may be deemed risky to the lender when either: 1) the second sale amount is vastly higher than the short sale amount, and 2) the two sale transactions are executed within a very short window of time.
  • Short sale fraud exists. While the exact definition of what constitutes fraud continues to evolve, CoreLogic analysis indicates lenders are consistently incurring more loss than necessary. Approximately one in every 53 (1.9 percent) short sale transactions was part of an egregious flip and therefore deemed risky.
  • It is estimated that lenders are incurring unnecessary losses of $300 million in short sale transactions annually.
  • Group, consortium analysis and reporting are necessary to fully leverage multiple-lender data and mitigate risk.

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