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Recent data released by CoreLogic shows that there has been a steady reduction in the number of distressed home sales, in 2015. This is despite the seasonal spike we noticed towards the end of the year.
The rate of distressed sales hit its peak in 2009, with 32.4 percent. As of October 2015, this had gone down to 10.2 percent, which is a drop of two percentage points since October 2014. The distressed sales for October 2015 included 6.9 percent real estate-owned (REO) properties, which is much lesser than its 2009 peak of 27.9 percent.
The sales were also 1.6 percent less than the REO sales from October 2014 and this is the lowest they have been since 2007. Short sales also saw a considerable drop in the latter part of 2015 and accounted for only 3.3 percent of all residential home sales in October. CoreLogic confirms that the number of short sales has been below 4 percent for over a year.
While the distressed sales have been declining, Fannie Mae and Freddie Mac have been selling large numbers of their “seriously-delinquent loans.” These Government-Sponsored Enterprises (GSEs) have taken this resort in order to restore stability to the housing market and to reach the portfolio reduction target set by the Senior Preferred Stock Purchase Agreement with the U.S. Treasury.
In November 2015, Fannie Mae announced that Fortress and Goldman Sachs won the bids for its third instalment of NPLs: about 7,000 loans worth $1.24 billion in unpaid principal balance (UPB). On December 8 Freddie Mac sold 5,311 non-performing loans (NPLs) that were worth around $1.1 billion in UPB.
The Federal Housing Finance Agency (FHFA) has certain guidelines for these NPL sales that require “Buyers of non-performing loans to offer loan modifications to borrowers and provide foreclosure alternatives whenever possible.” These guidelines were announced amidst a serious issue where big investors were hoarding on delinquent properties with the intention of renting them out versus selling. These investors also refused to issue loan modifications, thus leading to numerous foreclosures.
The FHFA’s new guidelines were announced to rectify this issue; they require servicers to keep foreclosure as the final resort and ask the GSEs to prove that their servicing partners are capable of working with delinquent loans and resolving issues without sending them into foreclosure. These guidelines and the increased NPL sales have impacted the number of distressed homes in the market and eventually reduced distressed home sales on average across the nation.
In certain cases, the investors buy numerous NPLs and work on modifying them to performing loans; this is done by reducing the interest rates or pardoning missed mortgage payments. As the homeowner starts making new and regular payments, the loan returns to being a performing loan. The alternate and sometimes the easier route is foreclosure. Industry experts know that the first option of modifying the loan is more profitable in the long run, but many investors choose the easier way out, leaving homeowners in a lurch.
With large pools of NPLs being sold, typically homeowners often have to start from scratch and go through a tedious process of building a relationship with the new servicing company in the picture. Current property managers/real estate brokers, on the other hand, lose their authority to manage a particular property and are uncertain of who is going to take over the management.
The increase in NPL sales have impacted homeowners and brokers heavily and experts say that this cycle is at its peak since the housing crisis hit; and even if it continues at the same high rate, it is bound to last for at least four more years.