Why Pre-foreclosure Short Sales Fail?

Property damage, a lack of funding on the seller's part and servicer hesitation are some of the chief reasons why short sales on pre-foreclosure homes fail, according to a recent study of real estate agents conducted by Campbell Communications.

Campbell Communications received 3,000 responses during its recent study—many of which placed some of the blame on servicers who are not willing to take losses on property values early on. Pre-foreclosure sales are significant in today's foreclosure-riddled marketplace with early sales having the potential to save a borrower from foreclosure via a transaction where the price is subsequently lower than the original value.

“One of the biggest obstacles cited by real estate agents in completing short sales is the delay in hearing back from mortgage servicers regarding a potential short sale,” the Campbell Communications Survey concluded. “On average, home listing agents reported it takes servicers 4.5 weeks to provide an answer on a potential short sale, resulting in many potential buyers simply walking away while awaiting a response to their offer. In contrast, mortgage servicers are much faster in providing a 'yes' or 'no' on REO sale offers as survey respondents reported a response time of less than two weeks on average.”

Despite experiencing problems with delays, Campbell Communications says in today's marketplace, pre-foreclosure short sales represent one in five transactions. The majority of these pre-foreclosures and short sales—approximately two-thirds—are initiated by the homeowner, while only one-third is prompted by the actions of mortgage servicers.

“Some of the delay in approving short sales appears to stem from a general reluctance by mortgage servicers to accept an up-front loss on a loan,” the Campbell study asserted.

A survey respondent elaborated on this by saying, “With rapidly declining prices, combined with 100-percent or greater financing, many of the sellers are so far in the hole that the mortgage companies are hesitant to accept what the market will bear, and end up forcing these [would-be] sellers into foreclosure. This results in months of lost time, huge legal fees and, in most cases, they get a home back in a much deteriorated condition, resulting in a net loss of thousands more than they would have had by agreeing to a short sale.”

The Campbell Survey also asked agents to rate the responsiveness of mortgage servicers when it comes to pre-foreclosures and short sales. The respondents gave favorable remarks to National City, HSBC Mortgage and Wells Fargo Home Mortgage, while the “lowest grades were given to Washington Mutual, American Home Mortgage and Aurora Loan Services," the Campbell study concluded.

Additional Data from the “Loss Mitigation in 2008: Real Estate Agents Report on Lender Practices”
(Source: Composed by Campbell Communications)

Significant Reasons Why Pre-Foreclosure/Short Sales Fail

- Home inspection/damage to property

- Seller would not sign deficiency note on short of mortgage balance

- Seller cannot pay real estate commission and/or HUD-1 closing costs

- Mortgage servicer attempted to reduce real estate commission

- Appraisal for buyer’s lender lower than contract price