Short Sale Research Study

8/9/2019 Short Sale Research Study

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The Cost o Short SalesCoreLogic Research StudyAn Analysis o 2010 Short Sale Trends, Risks, and Opportunities

STUDYAugust 2010


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Study 2010 Short Sale Research Study

2010 CoreLogic

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Source: CoreLogic

The data provided is for use only by the primary recipient or the primary recipient's publication, website or broadcast.This data may not be re-sold, republished or licensed to any other source, including publications and sources owned bythe primary recipient's parent company without prior written permission from CoreLogic. Any CoreLogic data used forpublication or broadcast, in whole or in part, must be sourced as coming from CoreLogic. The citation must directlyaccompany the first reference of the data. If the data is illustrated with maps, charts, graphs or other visual elements,CoreLogic must be cited with these visual elements.


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Proprietary and confidential. This material may not be reproduced in any orm without expressed written permission.iii

Table of Contents

Objective o the Study........................................................................................................................................................1

Executive Highlights ...........................................................................................................................................................2

Trends .............................................................................................................................................................................................3

Defining and Measuring the Risk ...............................................................................................................................4

Mitigating the Risk ...................................................................................................... .......................................................... 7

About CoreLogic....................................................................................................................................................................8


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Proprietary and confidential. This material may not be reproduced in any orm without expressed written permission.iv


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Proprietary and confidential. This material may not be reproduced in any orm without expressed written permission.1

Objective of the Study

The objective of this study is to understand the actual costs of residential mortgage short sales (or short payoffs) to

mortgage industry participants and the industry itself. A short sale is a real estate transaction in which the lenderpermits the borrower, who is unable to pay the mortgage for whatever reason, to sell the property for less than the totalamount due on the mortgage usually at a loss to the lender.

In the course of this study, we examined over 250,000 single family residence (SFR) short sale transactions during thepast two years. Analysis of these data not only helped us determine current trends in the short sale arena but clarified themany risks and opportunities that define the actual cost of these transactions.

Our main information resource was the CoreLogic group of industry-leading databases, representing 98% of real estatetransactions and 85% of existing mortgages. These data included loan-level detail on FHA, conventional, jumbo, prime,subprime, and Alt-A mortgages. The extensive current and historic loan detail enabled us to analyze speci fic aspects oftransactions, such as short sales, with tremendous precision.

Were pleased to share the results of this study with the lending community. Our hope is that we will contribute some

new facts to an understanding of the recent crisis, help minimize current mortgage losses, and facilitate avoidance of arepetition in the future.


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Executive Highlights

Following are key findings from the study:

The number of short sales has more than tripled since 2008. Multiple variables indicate short sales will continue tobe a significant factor for the industry.

During 2009 and 2010, over half of all short sales (55.8%) occurred in four states: California, Florida, Texas, and Arizona. Approximately 4% of short sales have a subsequent resale within 18 months.

Investor-driven short sales are not inherently bad, since investors provide the industry with necessary liquidity. Short sale transactions are risky for lenders when either (1) the second sale amount is vastly higher than theinitial short sale, and/or (2) the second sale transaction happens too soon after the first.

While the exact definition of what constitutes short sale fraud continues to evolve, it clearly exists. Our analysisshows a consistent pattern of lenders incurring more loss than necessary. About one in 53 short sale transactions in

our study (1.9%) was part of an egregiousfl

ip and therefore deemed risky. We estimate that lenders are currently incurring unnecessary losses in short sale transactions at the rate of$310million per year.

Information-sharing groups and consortia are key to lenders mitigating short sale risk and reducing associatedcosts. Only by leveraging multiple-lender data and experience can individual lenders see negative short sale riskpatterns in time to avoid the financial consequences


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Trends

Short sales have been, and will continue to be, an

inevitable and necessary part of the mortgage industryspost-crisis stabilization process. Historically, borrowersunable to sustain their mortgage payments were simplyforeclosed upon by lenders. But the foreclosure processitself can be expensive. During months of increasingdelinquency, the property may become distressed or windup abandoned entirely lowering its value substantially.The legal costs associated with suing the homeowner(which in many states is what foreclosure amounts to) addmore expense much more if contested.

Lenders, therefore, often consider short sales thelesser of two evils compared to foreclosure a way

they can minimize their overall losses. Losses on primeloans that go into foreclosure, for example, are 10%to 12% higher on average than those for short-soldloans. Generally speaking, all parties fare better whenforeclosures are prevented.

It is no surprise then that the number of short sales inthe market has more than tripled since 2008. FreddieMac recently reported that its short sale volumes were upover 700 percent compared to just two years ago1. Figure 1shows the overall trend.

The need for short sales will continue. At present,some 25% of all U.S. mortgages are in negativeequity homeowners owing more than their propertiesare worth. In some states, like Nevada, that number can goas high as 70%.

1 http://www.thestreet.com/story/10793930/1/reddie-ceo-short-sales-

up-600.html

SFR SHORT SALE VOLUME BY QUARTER

50,000

40,000

30,000

20,000

10,000

0

2008Q

1

2008Q

2

2008Q

3

2008Q

4

2009Q

4

2009Q

3

2009Q

2

2009Q

1

Figure 1.

Many hoped federally-initiated loan modification programs

would ease the pressure on these underwater homeowners.A recent study by the Special Inspector General for theTroubled Asset Relief Program, however, indicated that manyborrowers who entered such programs ultimately fell out,no longer meeting the loan modification criteria. Theseborrowers remain in a negative equity situation.

Other government programs, like the Home AffordableForeclosure Alternatives Program, are actuallyintended to drive short sales. To curb foreclosures, thatprogram offers cash incentives to key stakeholders(including homeowners) to execute and close short saletransactions. Its success, however, has been hampered

by what officials have acknowledged may be a lack ofnecessary antifraud protections.

These developments all point to an increase in shortsales and foreclosures.

Figure 2 shows the distribution of shorts sales by state.Over half of all short sales (55.8%) occur in just four states:California, Florida, Texas, and Arizona.

DISTRIBUTION OF SHORT SALES BY STATE

CO

NV

OH

MI

IL

NJ

VA

GA

WA

MD

NCTNORMO

PAIN

NYUT

KSMN

SC

CA

All OtherStates

FL

TXAZ

Figure 2.


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Defining and Measuring the Risk

There has been much discussion in the industry about short sale fraud. Initially defined by CoreLogic, short sale

fraud is a transaction, where parties involved in the process manipulate the short sale transaction and/or subsequenttransaction for a profit. Freddie Mac recently refined the definition: Any misrepresentation or deliberate omission offact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approvehad all facts been known.

One example of this is strategic default when a homeowner misrepresents his or her financial situation fabricatinguntrue hardship in order to qualify for a short sale.

Another short sale fraud happens when parties manipulate the short sale and/or subsequent resale of the property. InFigure 3 below, fraud occurs when the highest offer is deliberately withheld from the lender by the real estate agent.

ONE EXAMPLE OF SHORT SALE FRAUD

1Lender hires Real Estate Agent to Sell Property (short i necessary).

Mortgage = $150,000

2 Agent receives $120,000 ofer rom Private Party

3 Agent contacts non-arms-length Investor

4 Investor submits ofer o $100,000

5 Agent withholds highest ofer, submits only Investor ofer

6 Lender accepts Investor's $100,000 ofer

7Agent negotiates subsequent sale rom Investor to Private Party or

$120,000

Figure 3.

Most would agree that the previous examples are fraud. Opinions differ greatly, however, when an investor buys property

in a short sale and subsequently resells it for a profit in separate transactions. Such transactions are shown in Figures4and 5.


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Figure 4 may seem reasonable the investor disclosed his intent to resell and may have made legitimate improvementsto the property. Figure 5 is more questionable, since there is a 30% profit on the resale without any time having passedto improve the property. Also, based on Freddie Macs definition of fraud, you could conclude that the Figure 5 investordeliberately omitted the presence of an end buyer as well as the fact that the buyer was willing to pay a much higher pricefor the property.

LEGITIMATE? QUESTIONABLE?

1

Homeowner hires Real

Estate Agent to acilitate

a Short Sale. Mortgage =

$150,000

2

Agent receives $100,000

ofer rom Investor, which

discloses intent to resell

property

3Agent submits ofer o

$100,000 to Lender

4Lender accepts Investor's

$100,000 ofer

5Investor makes repairs/

improvements to home

6

Investor sells home

60 days ater short sale or

$120,000

1

Homeowner hires Real

Estate Agent to acilitate

a Short Sale. Mortgage =

$150,000

2

Agent receives $100,000

ofer rom Investor, which

discloses intent to resell

property

3

Investor negotiates to resell

property to Third Party

Buyer or $130,000

4Agent submits Investor

ofer o $100,000 to Lender

5Lender accepts Investor's

$100,000 ofer

6

Investor sells home

1 day ater short sale or

$130,000

Figure 4. Figure 5.

A rose by any other nameSo the question remains: are short sales with a subsequent, profitable resale especially investor-driven shortsales fraudulent? Lenders must be careful not to judge all such transactions the exact same way. If lenders were toexclude investors from short sale transactions or require them not to resell properties within a certain timeframe, theywould be turning down significant numbers of cash offers liquidity that they need. But continuing to do business asusual now means risking larger losses than necessary.

Rather than arguing over what is fraud and what isnt, lenders should focus on their primary objectiveeliminatingunnecessary loss. Since each short sale represents a loss by definition, how can lenders determine what constitutesunnecessary loss? At what point should a lender concludethat they are selling a property too short, potentiallyincurring more loss than necessary? Or can you only do

that after the fact?Time is key. For example, does a 30% short sale-to-resale profit margin seem questionable? It might if thetwo transactions happened on the same day. But if thetwo transactions happened nine months apart, manylegitimate factors may have come into play (homeimprovements, rising market, seasonality, etc.). Figure 6illustrates a basic principle: the greater the time betweentransactions, the greater the reasonable margin betweenthe two transaction amounts.

ACCEPTABLE SHORT SALE-TO-RESALE PROFIT MARGIN

Accept

able

ShortSale-to-Resal

e

Percentage

Gain

0Time Between Short Sale and Resale

Figure 6.


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CoreLogic took the trend line expressed above and overlaid it with actual transaction data. Figure 7 displays the results:about 4% of all short sales had a subsequent resale within 18 months. Lenders were at risk of incurring unnecessary lossin 47% of these transactions, or approximately 1.9% of all short sales (one in every 53).

SHORT SALE-TO-RESALE TRANSACTIONS

80%

70%

60%

50%

40%

30%

0

20%

10%

Days Between Short Sale and Subsequent Sale

Percentage

Gain

ofSubsequentSale

30 60 90 120 150 180

Low RiskHigh Risk Medium Risk

Figure 7.

Figure 8 below shows two real-life examples of short sale transactions where the lender may have incurredunnecessary loss.

SHORT SALE TRANSACTION EXAMPLES

Property Address 123 Main St., Shelton, Washington

000,570,1ytreporpsyubyknitS7002/42/8 $

000,614elaStrohSniytreporpsyubynapmoCtnemtsevnIhcimmiK9002/1/9 $

000,575areviRotytreporpsllesynapmoCtnemtsevnIhcimmiK9002/1/9 $

0 Days Profit 159,000$

Profit % 38%

Transactions

Figure 8.

Impact on the Industry

The financial impact of such unnecessary losses on the lending community is significant. As shown in Figure 9 below, weestimate that lenders are incurring nearly a third of a billion dollars in unnecessary loss annually.

ESTIMATED FINANCIAL I MPACT

Estimated Annual Short Sale Volume 400,000 % o Short Sales with Unnecessary Loss 1.87% Average Amount o Unnecessary Loss $41,500 Estimated Industry Financial Impact $310,000,000

Figure 9.

Property Address 123 Roosevelt Ave., Meridian, Idaho

000,005rednelhtiwnaolseifidomyknitS7002/72/7 $

Transactions

052,182elaStrohSniytreporpsyubhcimmiK9002/12/9 $

052,125areviRotytreporpslleshcimmiK9002/32/01 $

32 Days Profit 240,000$

Profit % 85%


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Mitigating the Risk

Our results suggest that lenders should take fundamental steps to alert themselves to the possibility of improper short

sale-to-resale transactions: Review documentation carefully, including resale disclosure details Confirm arms-length disclosures for all parties involved in the short sale Require borrower to confirm that he or she is not aware of any other parties or contracts associated with the

property and/or its short sale

Apply due diligence to ensure the borrowers income is accurate Apply due diligence to understand the current market value of property

Validate that claims of significant renovation were actually completed Ensure that the seller is the current owner of record.

Leveraging a Consortium to Detect Short Sale Fraud

Although the fundamental measures listed above can detect inadvertent or small-scale risks, they rarely expose systematicintentional fraud. To do so, lenders must be able to see any concurrent transactions pending on the short sale property.Traditionally, lenders have had no access to such information (at least not in real time), since two or more separate salestypically involve two or more separate lenders. This information can only be uncovered collectively affected lenders agreeto share information or via a formal lender consortium. The CoreLogic Mortgage Fraud Consortium is such a group.

The CoreLogic Mortgage Fraud Consortium is the informational foundation of the companys new Short Sale MonitoringSolution. This collective, consortium-based service allows lenders to benefit from both pre-closing and post-closing perspectives.

For short sales not yet closed, details of the transaction are matched against other pending loan applications inthe consortium database for the same property. When a matching record is found, an alert goes instantly to thelender recommending they delay the short sale decision pending further investigation.

For short sales already closed, the property is monitored continuously afterwards. Any subsequent loan closed on itwill generate alerts to both the original short sale lender and the resale lender, if different. Although too late to avoidthe original sale, it alerts the first lender to review sale terms for violations. It also alerts the new lender that if fraud isdiscovered in the dual transactions, they could be a party to it.

An additional benefit of participating in consortium information-sharing and analysis is the ability it gives lenders toevaluate real estate agencies and agents across multiple lender relationships. Real estate agents play a key role in mostshort sale transactions. They inevitably wear two hats, sometimes representing a lender, sometimes a seller. This putsthem in a tempting position to manipulate transactions for profit (as shown earlier in Figure 3). The Mortgage FraudConsortiums collective information and risk reporting can supply evidence of unethical behavior and provide lenders a

way to avoid involvement in potentially compromised future transactions.


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About CoreLogic

CoreLogic is a leading provider of consumer, financial and property information, analytics and services to business andgovernment. The company combines public, contributory and proprietary data to develop predictive decision analyticsand provide business services that bring dynamic insight and transparency to the markets it serves.

CoreLogic has built the largest and most comprehensive U.S. real estate, mortgage application, fraud, and loanperformance databases and is a recognized leading provider of mortgage and automotive credit reporting, property tax,valuation, flood determination, and geospatial analytics and services.

More than one million users rely on CoreLogic to assess risk, support underwriting, investment and marketing decisions,prevent fraud, and improve business performance in their daily operations. Formerly the information solutions groupof The First American Corporation, CoreLogic began trading under the ticker CLGX on the NYSE on June 2, 2010. Thecompany, headquartered in Santa Ana, Calif., has more than 10,000 employees globally with 2009 revenues of $2 billion.For more information visit www.corelogic.com

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Short Sale Research Study