There is an increasing number of short sales of distressed residential real estate loans, Fitch analysts said today.

The Federal Housing Finance Agency's (FHFA) recent announcement that the GSEs will implement rules to make short sales faster should further boost activity in this area.

According to the agency, the increased use of short sales can positively impact RMBS trusts since this strategy can improve and shorten liquidations and lower loss severities. 

On Tuesday  Lender Processing Services reported that the number of short sales exceeded the number of foreclosures for the first time in January, Fitch reported.

The rise in short sales should continue given the potential benefits offered to both lenders and borrowers, the rating agency stated.

Some borrowers might rather undergo short sales because, though they cannot stay in the property, they can often walk away with cash incentives from lenders and healthier credit reports unmarred by foreclosure. For lenders, short sales offer a more efficient and cheaper option to the foreclosure process.

Fitch said that short sales on non-agency RMBS are now completed 20 months after the last payment made on the loan, which is roughly 10 months less than the average time to foreclose.

The shorter timelines limit lenders' carrying costs that includes accrued loan interest and property taxes, among others. They also take out most of the legal expenses related to foreclosure and liquidation.

Loss severities tend to be much lower because of this. Typically for loans with similar attributes, short sales have severities 10%-15% less versus REO sales. As the proportion of short sales increases, analysts think that the average loss severities will further improve.  

The Federal Housing Finance Agency (FHFA)'s and GSEs' development of strategies to facilitate short sales, deeds-in-lieu, and deeds-for-lease starting this June, including the requirement for final decisions on short sales to be made within 60 calendar days,  will probably speed up this process.

Fitch also thinks that servicers will apply these practices to non-agency mortgages. For this reason, the agency sees this as a positive development that could have a favorable effect on RMBS. 

The positive effects include shorter liquidation timelines and improved loss severities, and another option that can help in clearing the distressed inventory overhang that still weighs on home prices, Fitch said.

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