Freddie CEO: Short Sales Up 600% - TheStreet

Freddie CEO: Short Sales Up 600%

Freddie Mac CEO Ed Haldeman said Monday that last-ditch tactics to prevent foreclosure, such as short sales, have risen drastically as the government scrambles to fix the housing mess.
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Freddie Mac


CEO Ed Haldeman said Monday that last-ditch tactics to prevent foreclosure, such as short sales, have risen drastically as the government scrambles to fix the housing mess.

Freddie Mac has been resorting to short sales seven times as much as it did two years ago, when the mortgage crisis first appeared dire, Haldeman said in a prepared statement. In such a sale, the lender and borrower agree to sell the home for less than the outstanding mortgage balance. In many cases, the bank and borrower share in the losses, but the short sale is deemed less costly and painful than foreclosure.

"The undisputable fact is that everybody wins when foreclosures are prevented," Haldeman said in a statement released on Monday.

Nonetheless, short sales and other last-ditch tactics -- such as "deed-in-lieu," in which a borrower simply hands over the property to a lender to wipe away most or all of his mortgage debt -- have a negative effect on home prices. It adds more inventory to the home supply, thereby depressing prices further.

Yet Haldeman points out that foreclosure can be even worse. Those properties often end up abandoned and in disarray. For instance, one in every 31 Nevada households received a foreclosure notice during the first quarter, more than double the national average of one in 80. Home prices there fell 12% between March 2009 and March 2010, vs. a national decline of under 1%.

Haldeman draws a correlation between those two factors -- amplified by high unemployment in the "Silver State" -- though it's unclear how much of a difference short sales would have made.

The government has been using Freddie Mac and its sister company,

Fannie Mae


as important tools in the housing recovery effort. Their purchases of mortgage-backed securities have helped push rates down lower, and their involvement in the federal HAMP program to help troubled borrowers has been key to getting big banks to cooperate.

They have also been granted an unlimited amount of taxpayer assistance and received $145 billion to-date to cover bad mortgage debt.

Haldeman, who has been leading the government-sponsored entity for nearly a year, indicated that while HAMP can help some borrowers, others need a more severe solution. Borrowers who are in over their heads may walk away from their homes, or squat until the mortgage lender kicks them out, thereby damaging credit reports and leading to bigger losses for banks.

About three million borrowers have been foreclosed upon since the start of the recession, and at least five million are at risk, according to Freddie Mac. Banks stand to lose 30% to 60% of the outstanding loan balance in such cases.

"For these reasons and more, foreclosure prevention is one of Freddie Mac's top priorities at this critical time," said Haldeman.

Fannie Mae outlined an initiative last week intended to punish those who walk away from homes, but are still able to pay. Fannie said those borrowers would not be eligible for a Fannie-sponsored loan for seven years, rather than the three-year hiatus required for those who were foreclosed upon.

However, there's been ample speculation that its crackdown will be unsuccessful. First because it's hard to identify such borrowers definitively. Furthermore, their credit scores may take seven years to improve enough to be eligible for a new loan anyway. SNL Financial's Zach Fox points out that such borrowers often walk away because they consider it financially responsible thing to do. Putting in punishments for walking away -- rather than incentives to stay and pay -- may be counterproductive.

-- Written by Lauren Tara LaCapra in New York