Short sales are a hot topic right now—especially with a much-ballyhooed government program focused on short sales, the Home Affordable Foreclosure Alternatives program, about to come online. But in the end, the real key to resolving the problems that yet remain in housing is likely to come back to an old standby: REO property sales.
Yes, really. But to understand why, you’ve got to first really understand the scope of the mortgage default problem we’ve now got.
According to data from Lender Processing Services, a whopping 7.4m loans are now non-current, compared to just 4.1m on average between January and June of 2008.
Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.
So, can short sales ride in to save the day for these 7.4m troubled borrowers? What about for the many millions more who are current on their loans, but are underwater on property value and unable to sell? For some, short sales will be an important solution—but don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived, and REO expertise will be prove to be the key to recovery, as it has been in prior cycles.
Thanks to effective intervention from the government, we won’t see REO volumes soar to peak levels anytime soon—but we will see elevated inflows at least through the mid-2012, out of necessity. And those inflows should be seen as the road to recovery by anyone watching real estate. JPM forecasts, for example, that by Q4 2012, 22-28% of home sales in the Los Angeles region of California will still be REO; in Phoenix, that number is projected to be 39-50%.
These projections underscore a message I’ve shared privately with many industry colleagues recently: recovery in housing is spelled R-E-O. Anything else is wasting time until we get there.