Felix Salmon

Short-sale datapoint of the day

By Felix Salmon
June 29, 2010

How long does it take to complete a short sale? If you have a prime loan from GMAC, it takes a full six months: painful. But what’s much worse is that GMAC is by far the fastest mortgage servicer of the lot: prime loans from Countrywide take, on average, 13 months. Subprime loans from Morgan Stanley’s Saxon unit are even worse, at 17 months. And then there’s the subprime loans from Equicredit and Ocwen, which take a mind-boggling 29 months to go through, on average.

Jorge Newberry has some common-sense ideas about how to speed things up a bit, but the fact is that these servicers have demonstrated their inability to do their jobs multiple times over the past few years: they’re simply overloaded. Too few staff, with too few qualifications, are trying to do too many things at once.

The result is predictably depressing: more foreclosures, less money for servicers, more distressed sales, more empty homes, lower house prices. Treasury has done nothing to alter this situation to date, and neither has Congress. So expect more of the same going forward, for years and years to come.

5 comments so far | RSS Comments RSS

Yeah, if they don’t get on the stick people might start thinking it was never really about housing in the first place, but getting hooked into meaningless financial obligations for bankers* to wrap in spandex and pimp countrywide.

* word used advisedly

Posted by HBC | Report as abusive

Yeah damn those evil lenders, kidnapping people in the middle of the night, torturing them until they sign the loan documents and threatening to kill if they don’t pay up…. oh wait a minute that would be loan sharks who apparently HBC thinks poor people should be forced to use.

Posted by Danny_Black | Report as abusive

It’s tempting to lay the blame on servicers’ lack of incentive to process these short-sales speedily. Or to suspect that banks aren’t eager to speed the process, because they’d like to wait to recognize the losses until their balance sheets are a little more robust, even if that ends up costing them more in the long run. And those are real problems, but they’re not the whole picture.

The bigger problem here is Milton Friedman. There is an absolute refusal to recognize the possibility that, for a variety of reasons, the lenders will not act in their own best interests unless forced to do so. That runs directly contrary to the axiomatic tenets of neoclassical economics – surely sophisticated businesses will always pursue their own economic self-interests, and have the ability to discern it.

But, alas, not. Banks are also bureaucracies; Weber is as relevant as Friedman. Speeding this process would involve massive hiring. Since there aren’t enough qualified people – short-sales used to be comparatively uncommon – that means that there will be a substantial lag as staff is trained. Moreover, banks are both loath to hire staff for what they perceive to be a short-term problem, and reluctant to expand payroll at this moment in time. And it goes beyond hiring. Few banks view restructuring, short-selling, or foreclosure processing as core to their missions. These are unglamorous areas of the bank. The executives in charge rank low on the totem poll, and are poorly positioned to press for the necessary changes. Finally, there’s outright denial. Executives are never interested in recognizing their own failures. That’s painful. They’d rather avert their eyes, even if that proves costly. Every short-sale is an admission of error, and forces the bank to pay the piper. No one is going to make a performance-related bonus for completing transactions faster that cost the bank huge amounts of money – even though that’s precisely the sort of performance that the bank ought to reward, because it results in long-term relative savings.

This is precisely where regulatory pressure is most useful – in compelling businesses to do things that are in everyone’s interest that they might not otherwise be willing to do themselves. But admitting that a free market might not produce such an outcome is simply too painful for leading economic policy makers, let along Congressional Republicans. And so we watch.

Posted by Cynic | Report as abusive

I know it is a fallacy to assume malevolence when incompetence will answer, but since means and opportunity are obviously present, I suggest the the banks are motivated to not do short sales because then they have to declare the loss instead of using “mark to wet dream” accounting and show the loan as full value.

Posted by msobel | Report as abusive

13 months and 17 months? from when? I’m guessing this is from delinquency?

Short sales take some time, but not that long. And, banks have become much quicker in the last 6 months or so by applying REO technology to the short sale process.

Just last week, I got approval on a GMAC short sale about 6 weeks after submitting the file.

Posted by agentgreg | Report as abusive

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