Fannie Mae and Freddie Mac are increasing their use of short sales, which is considered a better alternative for lenders and homeowners than a foreclosure sale, according to a report by their regulator.

The Federal Housing Finance Agency says the two government sponsored enterprises completed 23,400 short sales in the first quarter, compared to just 8,050 a year ago.

GSE servicers are expected to implement a new 'Home Affordable Foreclosure Alternative' program by August 1 that places more emphasis on short sales as an alternative to foreclosure.

Fannie and Freddie completed 92,760 foreclosure sales in the first quarter, up 27% from the previous quarter.

Short sales allow the homeowner to walk away from their house debt free and generally results in a higher sales price and less expenses than a foreclosure or REO. An Amherst Securities Group report shows that short sales have a significantly lower loss severity than REO sales, "but that difference has been narrowing over time."

ASG analysts note that servicers are becoming more proficient at short sales. However, the loan-to-value ratios on short sales have been increasing relative to REO sales. And the amount of servicer advances has increased more for short sales than for foreclosures.

"We believe the narrowing between short sale and REO sale is largely complete," Amherst says.

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