When I talk to realtors in many parts of the nation, they admit that foreclosures and short sales continue to be a key part of the housing activity in their area. Many analysts feel that the pace of short sales is likely to increase, especially given market conditions and the opinion that short sales are an alternative to foreclosure that can benefit the borrower and the lender. The lender sees potentially lower losses on the loan, and the borrower avoids the stigma of having a foreclosure on their credit history. The government continues to use various tools, such as modifications or foreclosure moratoria (moratoriums?) to prevent more loans from entering the REO market.

The short sale option is mostly offered to borrowers who are ineligible for or have failed to succeed in loan modifications, or just choose not to be modified and are certain to enter foreclosure (or are already there). The program can be economically beneficial to both parties involved.

For the servicer, the four main costs involved in selling the house are:

• Possible further depreciation in a declining market
• A discount to the overall market when sold
• The cost of principal and interest advanced to the trust until the house is sold
• Repair and maintenance costs.

Foreclosures, which turn into REO situations, typically take longer than a short sale, exposing the parties to more possible depreciation, and few banks & institutions are in the business of owning real estate (despite Fannie’s D4L program).In a foreclosure, servicers find that the expenses associated with the liquidation and repair costs are significant, given that foreclosed upon borrowers are unlikely to maintain the property. Most of the benefits of a short sale are due to the shortened timeline and cooperation from the resident. The house would also potentially attract better bids, as it is being actively maintained and lived in.

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