Short Sales to Affect Bank Owned Property Lists Only a Bit

The apparent rise in the popularity of distressed short sales will affect bank owned property lists only slightly, according to analysts using data from Lender Processing Services.

According to them, the short sale program called Home Affordable Foreclosure Alternatives will facilitate a number of short sales because of the incentives and the streamlined processes, but the impact will not be as strong as planned by federal housing officials. They reiterated that the major stumbling block to the HAFA program would be the second mortgages.

Based on data from LPS, there are now 7.4 million delinquent mortgages, a stunning spike from only 4.1 million in the first half of 2008. The severity of delinquency has also soared. For mortgages in default by more than three months but not yet put into foreclosure, the average number of days in delinquency is now 272 days, a sharp increase from 204 days in the first months of 2008.

For mortgages already in foreclosure, the average number of days in delinquency has already shot up to 410 days, a sharp jump from 260 days in early 2008.

If one looks closely at the data, one can see that those in foreclosure have not been paying for more than one year – another explanation for the regulated flow of repossessed properties entering bank owned property lists.

With these huge numbers of delinquent mortgages, one can realize how the HAFA program can make a dent on such a gargantuan problem.

What makes the problem worse is the finding that $1.053 trillion in second mortgages are still outstanding and that $963 billion of this amount is owed to thrift banks, commercial banks and credit unions. If the HAFA program eliminates much of the second liens, a large number of banks would suffer huge losses and could cause the collapse of the weaker ones.

According to Laurie Goodman of Amherst Securities, about 51 percent of primary mortgage loans have a secondary lien. For borrowers of Alt-A and prime loans, the percentage of those with second liens is even higher at 60 percent.

Financial analysts insist that there is no incentive for second lien holders to agree to short sales because of the huge losses they are facing.

All in all, the HAFA program, which has earned some attention and has pushed some short sales, has an inspired goal, but it will affect bank owned property lists only temporarily.

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