Short Sale Research Study
Content
STUDY
August 2010
The Cost of Short Sales CoreLogic Research Study
An Analysis of 2010 Short Sale Trends, Risks, and Opportunities
Study 2010 Short Sale Research Study
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 by the primary recipient's parent company without prior written permission from CoreLogic. Any CoreLogic data used for publication or broadcast, in whole or in part, must be sourced as coming from CoreLogic. The citation must directly accompany 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.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
ii
Study 2010 Short Sale Research Study
Table of Contents
Objective of the Study ........................................................................................................................................................ 1 Executive Highlights ........................................................................................................................................................... 2 Trends ............................................................................................................................................................................................. 3 Defining and Measuring the Risk ...............................................................................................................................4 Mitigating the Risk ................................................................................................................................................................ 7 About CoreLogic .................................................................................................................................................................... 8
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
iii
Study 2010 Short Sale Research Study
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
iv
Study 2010 Short Sale Research Study
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 lender permits the borrower, who is unable to pay the mortgage for whatever reason, to sell the property for less than the total amount 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 the past two years. Analysis of these data not only helped us determine current trends in the short sale arena but clarified the many 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 estate transactions 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 specific aspects of transactions, such as short sales, with tremendous precision. We’re 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 a repetition in the future.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
1
Study 2010 Short Sale Research Study
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 to be 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 the initial 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 analysis shows 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 egregious flip — and therefore deemed risky. We estimate that lenders are currently incurring unnecessary losses in short sale transactions at the rate of $310 million per year. Information-sharing groups and consortia are key to lenders mitigating short sale risk and reducing associated costs. Only by leveraging multiple-lender data and experience can individual lenders see negative short sale risk patterns in time to avoid the financial consequences
► ► ► ►
►
►
►
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
2
Study 2010 Short Sale Research Study
Trends
Short sales have been, and will continue to be, an inevitable and necessary part of the mortgage industry’s post-crisis stabilization process. Historically, borrowers unable to sustain their mortgage payments were simply foreclosed upon by lenders. But the foreclosure process itself can be expensive. During months of increasing delinquency, the property may become distressed or wind up abandoned entirely — lowering its value substantially. The legal costs associated with suing the homeowner (which in many states is what foreclosure amounts to) add more expense — much more if contested. Lenders, therefore, often consider short sales the lesser of two evils compared to foreclosure — a way they can minimize their overall losses. Losses on prime loans that go into foreclosure, for example, are 10% to 12% higher on average than those for short-sold loans. Generally speaking, all parties fare better when foreclosures are prevented. It is no surprise then that the number of short sales in the market has more than tripled since 2008. Freddie Mac recently reported that its short sale volumes were up over 700 percent compared to just two years ago1. Figure 1 shows the overall trend.
SFR SHORT SALE VOLUME BY QUARTER
Many hoped federally-initiated loan modification programs would ease the pressure on these underwater homeowners. A recent study by the Special Inspector General for the Troubled Asset Relief Program, however, indicated that many borrowers who entered such programs ultimately fell out, no longer meeting the loan modification criteria. These borrowers remain in a negative equity situation. Other government programs, like the Home Affordable Foreclosure Alternatives Program, are actually intended to drive short sales. To curb foreclosures, that program offers cash incentives to key stakeholders (including homeowners) to execute and close short sale transactions. Its success, however, has been hampered by what officials have acknowledged may be a lack of necessary antifraud protections. These developments all point to an increase in short sales — 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
50,000 40,000 30,000 20,000 10,000
UT NY IN PA MO OR TN NC MD WA GA VA
SC All Other MN States KS
CA
0
2 3 8Q 4 9Q 1 2 1 3 9Q 4 8Q 8Q 9Q 8Q 9Q 0 0 0 0 0 0 0 20 20 20 20 20 20 20 20 0
NJ IL MI CO AZ NV OH TX FL
Figure 1.
The need for short sales will continue. At present, some 25% of all U.S. mortgages are in negative equity — homeowners owing more than their properties are worth. In some states, like Nevada, that number can go as high as 70%.
Figure 2.
1
http://www.thestreet.com/story/10793930/1/freddie-ceo-short-salesup-600.html
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
3
Study 2010 Short Sale Research Study
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 subsequent transaction for a profit.” Freddie Mac recently refined the definition: “Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known.” One example of this is strategic default when a homeowner misrepresents his or her financial situation — fabricating untrue 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. In Figure 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
1
Lender hires Real Estate Agent to Sell Property (short if necessary). Mortgage = $150,000
2
Agent receives $120,000 offer from Private Party
3
Agent contacts non-arms-length Investor
4
Investor submits offer of $100,000
5
Agent withholds highest offer, submits only Investor offer
6
Lender accepts Investor's $100,000 offer
7
Agent negotiates subsequent sale from Investor to Private Party for $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 Figures 4 and 5.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
4
Study 2010 Short Sale Research Study
Figure 4 may seem reasonable — the investor disclosed his intent to resell and may have made legitimate improvements to the property. Figure 5 is more questionable, since there is a 30% profit on the resale without any time having passed to improve the property. Also, based on Freddie Mac’s definition of fraud, you could conclude that the Figure 5 investor deliberately omitted the presence of an end buyer as well as the fact that the buyer was willing to pay a much higher price for the property.
LEGITIMATE? QUESTIONABLE?
1
Homeowner hires Real Estate Agent to facilitate a Short Sale. Mortgage = $150,000 Agent receives $100,000 offer from Investor, which discloses intent to resell property Agent submits offer of $100,000 to Lender Lender accepts Investor's $100,000 offer Investor makes repairs/ improvements to home Investor sells home 60 days after short sale for $120,000
Figure 4.
1
Homeowner hires Real Estate Agent to facilitate a Short Sale. Mortgage = $150,000 Agent receives $100,000 offer from Investor, which discloses intent to resell property Investor negotiates to resell property to Third Party Buyer for $130,000 Agent submits Investor offer of $100,000 to Lender Lender accepts Investor's $100,000 offer Investor sells home 1 day after short sale for $130,000
Figure 5.
2
2
3
3
4
4
5
5
6
6
“A rose by any other name…”
So the question remains: are short sales with a subsequent, profitable resale — especially investor-driven short sales — fraudulent? Lenders must be careful not to judge all such transactions the exact same way. If lenders were to exclude investors from short sale transactions or require them not to resell properties within a certain timeframe, they would be turning down significant numbers of cash offers — liquidity that they need. But continuing to do business as usual now means risking larger losses than necessary. Rather than arguing over what is fraud and what isn’t, lenders should focus on their primary objective—eliminating unnecessary loss. Since each short sale represents a loss by definition, how can lenders determine what constitutes unnecessary loss? At what point should a lender conclude ACCEPTABLE SHORT SALE-TO-RESALE PROFIT MARGIN that they are selling a property too short, potentially incurring more loss than necessary? Or can you only do that after the fact? Time is key. For example, does a 30% short sale-toresale profit margin seem questionable? It might if the two transactions happened on the same day. But if the two transactions happened nine months apart, many legitimate factors may have come into play (home improvements, rising market, seasonality, etc.). Figure 6 illustrates a basic principle: the greater the time between transactions, the greater the reasonable margin between the two transaction amounts.
Short Sale-to-Resale Percentage Gain
ept Acc
able
0
Time Between Short Sale and Resale
Figure 6.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
5
Study 2010 Short Sale Research Study
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 loss in 47% of these transactions, or approximately 1.9% of all short sales (one in every 53).
SHORT SALE-TO-RESALE TRANSACTIONS
Percentage Gain of Subsequent Sale
80% 70% 60% 50% 40% 30% 20% 10% 0 30 60 90 120 150 180 Days Between Short Sale and Subsequent Sale
High Risk
Medium Risk
Figure 7.
Low Risk
Figure 8 below shows two real-life examples of short sale transactions where the lender may have incurred unnecessary loss.
SHORT SALE TRANSACTION EXAMPLES
Property Address 123 Main St., Shelton, Washington
Property Address 123 Roosevelt Ave., Meridian, Idaho
Transactions 8/24/2007 9/1/2009 9/1/2009 Stinky buys property Kimmich Investment Company buys property in Short Sale Kimmich Investment Company sells property to Rivera $ $ $ 1,075,000 416,000 575,000
Transactions 7/27/2007 9/21/2009 10/23/2009 Stinky modifies loan with lender Kimmich buys property in Short Sale Kimmich sells property to Rivera $ $ $ 500,000 281,250 521,250
0 Days
Profit Profit %
$
159,000 38%
32 Days
Profit Profit %
$
240,000 85%
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, we estimate that lenders are incurring nearly a third of a billion dollars in unnecessary loss annually.
ESTIMATED FINANCIAL IMPACT
► ► ► ►
Estimated Annual Short Sale Volume % of Short Sales with Unnecessary Loss Average Amount of Unnecessary Loss Estimated Industry Financial Impact
Figure 9.
400,000 1.87% $41,500 $310,000,000
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
6
Study 2010 Short Sale Research Study
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 arm’s-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 borrower’s 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 systematic intentional 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 sales typically involve two or more separate lenders. This information can only be uncovered collectively — affected lenders agree to 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 company’s new Short Sale Monitoring Solution. 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 in the consortium database for the same property. When a matching record is found, an alert goes instantly to the lender — 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 it will generate alerts to both the original short sale lender and the resale lender, if different. Although too late to avoid the original sale, it alerts the first lender to review sale terms for violations. It also alerts the new lender that if fraud is discovered 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 to evaluate real estate agencies and agents across multiple lender relationships. Real estate agents play a key role in most short sale transactions. They inevitably wear two hats, sometimes representing a lender, sometimes a seller. This puts them in a tempting position to manipulate transactions for profit (as shown earlier in Figure 3). The Mortgage Fraud Consortium’s collective information and risk reporting can supply evidence of unethical behavior and provide lenders a way to avoid involvement in potentially compromised future transactions.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
7
Study 2010 Short Sale Research Study
About CoreLogic
CoreLogic is a leading provider of consumer, financial and property information, analytics and services to business and government. The company combines public, contributory and proprietary data to develop predictive decision analytics and 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 loan performance 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 group of The First American Corporation, CoreLogic began trading under the ticker CLGX on the NYSE on June 2, 2010. The company, 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 CoreLogic 4 First American Way Santa Ana, CA 92707
FOR MORE INFORMATION PLEASE CALL 1-866-774-3282
© 2010 CoreLogic CORELOGIC is a registered trademark of CoreLogic All other trademarks are the property of their respective holders. Proprietary and confidential. This material may not be reproduced in any form without expressed written permission. 17-SSRSTDY-0810-04
corelogic.com
August 2010
The Cost of Short Sales CoreLogic Research Study
An Analysis of 2010 Short Sale Trends, Risks, and Opportunities
Study 2010 Short Sale Research Study
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 by the primary recipient's parent company without prior written permission from CoreLogic. Any CoreLogic data used for publication or broadcast, in whole or in part, must be sourced as coming from CoreLogic. The citation must directly accompany 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.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
ii
Study 2010 Short Sale Research Study
Table of Contents
Objective of the Study ........................................................................................................................................................ 1 Executive Highlights ........................................................................................................................................................... 2 Trends ............................................................................................................................................................................................. 3 Defining and Measuring the Risk ...............................................................................................................................4 Mitigating the Risk ................................................................................................................................................................ 7 About CoreLogic .................................................................................................................................................................... 8
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
iii
Study 2010 Short Sale Research Study
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
iv
Study 2010 Short Sale Research Study
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 lender permits the borrower, who is unable to pay the mortgage for whatever reason, to sell the property for less than the total amount 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 the past two years. Analysis of these data not only helped us determine current trends in the short sale arena but clarified the many 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 estate transactions 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 specific aspects of transactions, such as short sales, with tremendous precision. We’re 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 a repetition in the future.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
1
Study 2010 Short Sale Research Study
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 to be 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 the initial 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 analysis shows 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 egregious flip — and therefore deemed risky. We estimate that lenders are currently incurring unnecessary losses in short sale transactions at the rate of $310 million per year. Information-sharing groups and consortia are key to lenders mitigating short sale risk and reducing associated costs. Only by leveraging multiple-lender data and experience can individual lenders see negative short sale risk patterns in time to avoid the financial consequences
► ► ► ►
►
►
►
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
2
Study 2010 Short Sale Research Study
Trends
Short sales have been, and will continue to be, an inevitable and necessary part of the mortgage industry’s post-crisis stabilization process. Historically, borrowers unable to sustain their mortgage payments were simply foreclosed upon by lenders. But the foreclosure process itself can be expensive. During months of increasing delinquency, the property may become distressed or wind up abandoned entirely — lowering its value substantially. The legal costs associated with suing the homeowner (which in many states is what foreclosure amounts to) add more expense — much more if contested. Lenders, therefore, often consider short sales the lesser of two evils compared to foreclosure — a way they can minimize their overall losses. Losses on prime loans that go into foreclosure, for example, are 10% to 12% higher on average than those for short-sold loans. Generally speaking, all parties fare better when foreclosures are prevented. It is no surprise then that the number of short sales in the market has more than tripled since 2008. Freddie Mac recently reported that its short sale volumes were up over 700 percent compared to just two years ago1. Figure 1 shows the overall trend.
SFR SHORT SALE VOLUME BY QUARTER
Many hoped federally-initiated loan modification programs would ease the pressure on these underwater homeowners. A recent study by the Special Inspector General for the Troubled Asset Relief Program, however, indicated that many borrowers who entered such programs ultimately fell out, no longer meeting the loan modification criteria. These borrowers remain in a negative equity situation. Other government programs, like the Home Affordable Foreclosure Alternatives Program, are actually intended to drive short sales. To curb foreclosures, that program offers cash incentives to key stakeholders (including homeowners) to execute and close short sale transactions. Its success, however, has been hampered by what officials have acknowledged may be a lack of necessary antifraud protections. These developments all point to an increase in short sales — 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
50,000 40,000 30,000 20,000 10,000
UT NY IN PA MO OR TN NC MD WA GA VA
SC All Other MN States KS
CA
0
2 3 8Q 4 9Q 1 2 1 3 9Q 4 8Q 8Q 9Q 8Q 9Q 0 0 0 0 0 0 0 20 20 20 20 20 20 20 20 0
NJ IL MI CO AZ NV OH TX FL
Figure 1.
The need for short sales will continue. At present, some 25% of all U.S. mortgages are in negative equity — homeowners owing more than their properties are worth. In some states, like Nevada, that number can go as high as 70%.
Figure 2.
1
http://www.thestreet.com/story/10793930/1/freddie-ceo-short-salesup-600.html
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
3
Study 2010 Short Sale Research Study
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 subsequent transaction for a profit.” Freddie Mac recently refined the definition: “Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known.” One example of this is strategic default when a homeowner misrepresents his or her financial situation — fabricating untrue 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. In Figure 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
1
Lender hires Real Estate Agent to Sell Property (short if necessary). Mortgage = $150,000
2
Agent receives $120,000 offer from Private Party
3
Agent contacts non-arms-length Investor
4
Investor submits offer of $100,000
5
Agent withholds highest offer, submits only Investor offer
6
Lender accepts Investor's $100,000 offer
7
Agent negotiates subsequent sale from Investor to Private Party for $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 Figures 4 and 5.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
4
Study 2010 Short Sale Research Study
Figure 4 may seem reasonable — the investor disclosed his intent to resell and may have made legitimate improvements to the property. Figure 5 is more questionable, since there is a 30% profit on the resale without any time having passed to improve the property. Also, based on Freddie Mac’s definition of fraud, you could conclude that the Figure 5 investor deliberately omitted the presence of an end buyer as well as the fact that the buyer was willing to pay a much higher price for the property.
LEGITIMATE? QUESTIONABLE?
1
Homeowner hires Real Estate Agent to facilitate a Short Sale. Mortgage = $150,000 Agent receives $100,000 offer from Investor, which discloses intent to resell property Agent submits offer of $100,000 to Lender Lender accepts Investor's $100,000 offer Investor makes repairs/ improvements to home Investor sells home 60 days after short sale for $120,000
Figure 4.
1
Homeowner hires Real Estate Agent to facilitate a Short Sale. Mortgage = $150,000 Agent receives $100,000 offer from Investor, which discloses intent to resell property Investor negotiates to resell property to Third Party Buyer for $130,000 Agent submits Investor offer of $100,000 to Lender Lender accepts Investor's $100,000 offer Investor sells home 1 day after short sale for $130,000
Figure 5.
2
2
3
3
4
4
5
5
6
6
“A rose by any other name…”
So the question remains: are short sales with a subsequent, profitable resale — especially investor-driven short sales — fraudulent? Lenders must be careful not to judge all such transactions the exact same way. If lenders were to exclude investors from short sale transactions or require them not to resell properties within a certain timeframe, they would be turning down significant numbers of cash offers — liquidity that they need. But continuing to do business as usual now means risking larger losses than necessary. Rather than arguing over what is fraud and what isn’t, lenders should focus on their primary objective—eliminating unnecessary loss. Since each short sale represents a loss by definition, how can lenders determine what constitutes unnecessary loss? At what point should a lender conclude ACCEPTABLE SHORT SALE-TO-RESALE PROFIT MARGIN that they are selling a property too short, potentially incurring more loss than necessary? Or can you only do that after the fact? Time is key. For example, does a 30% short sale-toresale profit margin seem questionable? It might if the two transactions happened on the same day. But if the two transactions happened nine months apart, many legitimate factors may have come into play (home improvements, rising market, seasonality, etc.). Figure 6 illustrates a basic principle: the greater the time between transactions, the greater the reasonable margin between the two transaction amounts.
Short Sale-to-Resale Percentage Gain
ept Acc
able
0
Time Between Short Sale and Resale
Figure 6.
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
5
Study 2010 Short Sale Research Study
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 loss in 47% of these transactions, or approximately 1.9% of all short sales (one in every 53).
SHORT SALE-TO-RESALE TRANSACTIONS
Percentage Gain of Subsequent Sale
80% 70% 60% 50% 40% 30% 20% 10% 0 30 60 90 120 150 180 Days Between Short Sale and Subsequent Sale
High Risk
Medium Risk
Figure 7.
Low Risk
Figure 8 below shows two real-life examples of short sale transactions where the lender may have incurred unnecessary loss.
SHORT SALE TRANSACTION EXAMPLES
Property Address 123 Main St., Shelton, Washington
Property Address 123 Roosevelt Ave., Meridian, Idaho
Transactions 8/24/2007 9/1/2009 9/1/2009 Stinky buys property Kimmich Investment Company buys property in Short Sale Kimmich Investment Company sells property to Rivera $ $ $ 1,075,000 416,000 575,000
Transactions 7/27/2007 9/21/2009 10/23/2009 Stinky modifies loan with lender Kimmich buys property in Short Sale Kimmich sells property to Rivera $ $ $ 500,000 281,250 521,250
0 Days
Profit Profit %
$
159,000 38%
32 Days
Profit Profit %
$
240,000 85%
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, we estimate that lenders are incurring nearly a third of a billion dollars in unnecessary loss annually.
ESTIMATED FINANCIAL IMPACT
► ► ► ►
Estimated Annual Short Sale Volume % of Short Sales with Unnecessary Loss Average Amount of Unnecessary Loss Estimated Industry Financial Impact
Figure 9.
400,000 1.87% $41,500 $310,000,000
© 2010 CoreLogic Proprietary and confidential. This material may not be reproduced in any form without expressed written permission.
6
Study 2010 Short Sale Research Study
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 arm’s-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 borrower’s 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 systematic intentional 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 sales typically involve two or more separate lenders. This information can only be uncovered collectively — affected lenders agree to 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 company’s new Short Sale Monitoring Solution. 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 in the consortium database for the same property. When a matching record is found, an alert goes instantly to the lender — 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 it will generate alerts to both the original short sale lender and the resale lender, if different. Although too late to avoid the original sale, it alerts the first lender to review sale terms for violations. It also alerts the new lender that if fraud is discovered 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 to evaluate real estate agencies and agents across multiple lender relationships. Real estate agents play a key role in most short sale transactions. They inevitably wear two hats, sometimes representing a lender, sometimes a seller. This puts them in a tempting position to manipulate transactions for profit (as shown earlier in Figure 3). The Mortgage Fraud Consortium’s 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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Study 2010 Short Sale Research Study
About CoreLogic
CoreLogic is a leading provider of consumer, financial and property information, analytics and services to business and government. The company combines public, contributory and proprietary data to develop predictive decision analytics and 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 loan performance 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 group of The First American Corporation, CoreLogic began trading under the ticker CLGX on the NYSE on June 2, 2010. The company, 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 CoreLogic 4 First American Way Santa Ana, CA 92707
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