Online auctions deliver on pre-lockdown sales promises

According to recent data from Auction.com’s Market Validation Program (MVP) for pre-lockdown sales, the great promise of short sales and other troubled pre-lockdown sales as an alternative to lockdown is fully realized. carried out on a competitive and transparent online auction market. . Auctions effectively secure the highest and best offer, which is good for the distressed homeowner, the surrounding neighborhood, and the mortgage officer.

Before diving into recent MVP data, it is important to consider the historical context of short selling and other pre-lockdown selling.

Pre-foreclosure sales have long held great promise as an alternative to foreclosure. Pre-foreclosure sales can provide struggling homeowners with a graceful exit that allows them to avoid foreclosure – and avoid the eviction and damaged credit that come with a foreclosure.

Pre-foreclosure sales as an alternative to foreclosure also benefit neighborhoods by limiting the volume of vacant properties, which drive down the value of surrounding homes.

fall short

Unfortunately, the reality of pre-lockdown sales fell well short of (no pun intended) promise during the wave of real estate distress that emerged in the wake of the 2008 recession. Much of the attention at aftermath of this crisis was, naturally, about loan modifications. These loan modifications were intended to adjust mortgage payments to help keep struggling borrowers in homes.

When some of these modified mortgages fell back into default – more than 45% in the government-backed Making Home Affordable (MHA) scheme – short sales then became a secondary foreclosure alternative for many struggling homeowners .

This becomes quite evident in the performance outcome data of the MHA program. More than 1.7 million permanent modifications have been launched under the program, according to a 2017 fourth quarter report from the US Treasury. By comparison, 406,652 short sales were made under the program, which ran from 2009 to 2016.

More than 45% of the 1.7 million MHA modifications fell back into a serious delinquent status (90 days or more overdue), according to a third-quarter 2020 MHA report. That leaves nearly 800,000 overdue loans where a sale short (or a capital sale before foreclosure if the property has since recovered equity) could help the owner avoid foreclosure.

Opportunity lost

The huge opportunity of pre-foreclosure sales as an alternative to foreclosure becomes even more evident when looking through the lens of all foreclosures made over the past decade. An Auction.com analysis of public records data from ATTOM Data Solutions as well as proprietary data from its own foreclosure auction platform estimates that 6.8 million properties foreclosed between 2009 and 2019 could potentially have qualified for a short selling from a home equity perspective.

The 6.8 million are the properties that did not have at least 20% equity at the foreclosure auction, meaning the owner and managing agent could have chosen to list the property as a short sale before the foreclosure auction.

The 6.8 million represent 98% of the total 6.9 million properties that have completed the foreclosure process – either selling to a third-party buyer or returning to the foreclosure lender at a foreclosure auction – during the 2009 to 2019 period. The remaining 2% could also have potentially avoided foreclosure through a pre-foreclosure stock sale, an even more favorable foreclosure alternative that allows the owner to walk away with a portion of the proceeds of sale with free exit.

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Pre-foreclosure potential

There are good reasons why many potential short sales have resulted in completed foreclosures over the past decade. Short sales are complex transactions involving difficult compromises and hard-earned approvals from multiple parties, including an owner whose first choice is likely not to sell, and one or more lenders who lose money on the sale.

But while short sales are difficult and less than ideal for the borrower and lender (or lenders) involved, the alternative – foreclosure – is far worse for those same parties. As mentioned earlier, foreclosure means that distressed borrowers lose the home through a forced sale over which they have no control and are then forced to vacate the home immediately or face harrowing eviction proceedings.

That’s why it’s important to put short sales and other pre-foreclosure sales at the forefront of foreclosure prevention strategy as the mortgage services industry processes the millions of delinquent and forborne mortgages in due to the 2020 recession.

The mortgage services industry has come a long way in the last decade when it comes to embracing foreclosure, but there’s still a long way to go. Pre-foreclosure sales accounted for a third of all distressed sales in 2019, up from less than 15% in 2008. This progress is admirable, but there is still a huge opportunity to avoid many more foreclosures with a pre-foreclosure sale. .

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Market validation

Auction.com has extensive experience with pre-foreclosure auctions, pioneering the concept in 2013 and selling over 4,000 properties through pre-foreclosure auctions over the past decade. Its market validation program leverages the power of the Auction.com platform and its more than 6 million distressed real estate buyers to validate – and usually beat – offers received in the traditional market.

Interest in MVP has grown in recent months as mortgage managers seek compassionate and responsible disposition alternatives for the growing number of distressed homeowners impacted by the pandemic. This program aims not only to validate the market for an existing offer, but also to proactively help struggling borrowers who have not yet listed the property to obtain the highest and best offer while avoiding foreclosure. .

Four key MVP metrics from August to December demonstrate how Auction.com’s transparent and competitive online marketplace is delivering on the promise of pre-lockdown sales as an alternative to foreclosure.

First, nearly 60% of properties auctioned on Auction.com received a higher bid than the highest bid received through the traditional short sale listing on the Multiple Listing Service, or MLS.

Second, these winning auction bids were on average 15% higher than the highest bid received via MLS. In dollars, that’s on average more than $28,000 more. In some cases, the high bidding bid was high enough to turn the short sale into an equity sale, a startling result for the distressed owner.

Third, the auction environment has not only attracted new buyers, it has also motivated buyers already interested in the property to bid higher. More than 75% of winning auction bids came from first-time buyers who did not submit the highest bid on MLS. The rest of the winning auction bids – which exceeded the highest bid on MLS – came from the same buyer who submitted the highest bid on MLS.

Finally, winning bids were received quickly — on average in the first round of bidding. This is within 14 days of first marketing at auction and within seven days of auction.

These four parameters clearly show how online auctions, when used in tandem with traditional sales methods, ensure a level playing field for a wide range of potential buyers of short sales and other pre-foreclosure sales. . This in turn guarantees the highest and best offer for these homes, which is good for the distressed homeowner, the surrounding neighborhood and the mortgage service.