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Short Sales Likely to Surpass Loan Modifications

(8/23/10)

While last year it was the loan modification effort which was at the forefront of the debate on solutions to the housing crisis, this year it is the short sale which is taking front and center stage. A short sale occurs when a property is sold for less than the existing mortgage lien(s) secured against it. Short sale volume has tripled in the past two years and is estimated to impact almost 400,000 properties annually. A primary focus for lenders in the short sale process is to try to curtail the almost $310 million that is being siphoned off in unnecessary losses annually, it is estimated that an average loss of approximately $42K occurs in 2% of all short sale transactions. The cost-benefit analysis for the lender boils down to how much they are willing to spend going though the foreclosure process vs. accepting cash now and off-loading a property they might be unable to sell down the line. Further complicating the decision, just as with the loan modification process, is whether there is a second lien-holder involved who needs to sign off on the transaction and must be agreeable to accepting a loss. As the economy continues to deteriorate and renewed weakness emerges, short sales are likely to become even more commonplace.

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