Loss Severity on Short Sales 13% Lower than REO: Report

Over the past year, the mortgage risk analysis firm ""Clayton Holdings"":http://www.claytongroup.com says it has witnessed an overall increase in short sale activity.
[IMAGE] Because of the growing emphasis on keeping borrowers out of foreclosure, servicers are becoming more inclined to employ alternative loss mitigation strategies. And Clayton says the added benefit to servicers â€" the one with dollar signs in front of it â€" is that loss severities for properties sold through short sale are 13 percent lower than loss severities for REO sales.

In states with extended foreclosure timelines, short sale loss severities dropped even lower â€" 26 percent below REO loss severities. The analysts at Clayton Holdings examined performance indicators across nine servicers' internal proprietary short sale programs, from October 2009 to March 2010.

In addition, the data showed that short sales cost bondholders about half the amount in fees and advances as REO sales, saving roughly $16,000 per sale.

""Given the reduced loss severities, it appears that short sale strategies currently used by servicers are producing favorable outcomes when compared to REO sales,"" the analysts wrote in their report.

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Clayton says servicers with the lowest loss severities for short sales employ a variety of strategies including outsourcing, utilizing dedicated short sale teams, working directly with local broker networks, and setting list prices based on historical and geographical REO net proceeds.

Of these, the servicing data examined by Clayton analysts shows the strongest correlations to reduced loss severities with outsourcing and the utilization of devoted short sale teams.

Servicers indicate that they have partnered with vendors to outsource all or part of the short sale process, such as document processing, according to Clayton. The company says servicers may choose to outsource when a vendor has more experience with short sales, a record of negotiating better offers, or processes short sales at a lower cost.

The dedication of short sale teams within a servicing organization is also recommended, Clayton said, noting that dedicated teams bring unique skill sets to negotiation of the short sale and remove a significant volume of calls from the general loss mitigation queue.

Clayton also found that servicers who obtain interior valuations prior to the acceptance of a short sale offer have the best chance of ensuring the offer is in line with the value and if necessary, can renegotiate to get a higher offer, thus further reducing loss severities.

The report also notes that servicers possessing delegated authority from the mortgage insurance companies to approve short sales also appear to have greater correlation with lower loss severities.

Clayton says delegated authority reduces the additional months of servicing advances as the sale can be completed faster. It also reduces the likelihood that potential buyers will walk away from the deal as a result of delayed approval from the mortgage insurer.