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New study shows increase in pre-foreclosure and short salesMortgagePress.commortgage servicer loss mitigation practices and performance The mortgage industry's ongoing attempts to reduce mortgage defaults and losses in the current depressed housing market have produced a big jump in the number of pre-foreclosure and short sales now taking place. Nevertheless, problems ranging from delays in servicer action to home inspection issues continue to result in many failed pre-foreclosure and short sales transactions. These are among the many revelations coming from a major new study of mortgage servicer loss mitigation practices and performance. The new study was sponsored by Inside Mortgage Finance, a mortgage industry newsletter. The new research is based on a nationwide survey of real estate agents conducted by Campbell Communications in March that produced more than 3,000 validated responses. In addition to tracking important trends in how mortgage servicers deal with pre-foreclosure, short sales, foreclosures and real estate owned (REO), the study rates all major firms on their loss mitigation performance in various categories. One of the most significant findings in the new research is that pre-foreclosure and short sales now account for about one-fifth of completed home sale transactions nationwide. Pre-foreclosure sales are home sales that are initiated to avoid foreclosures, while short sales are pre-foreclosure sales where the sale price is below the mortgage debt owed. According to survey respondents, about two-thirds of pre-foreclosure and short sales are homeowner-initiated, while the balance, one-third, is mortgage servicer-initiated. For homeowners initiating short sales, the most common reason given was the inability to make mortgage payments. However, one-quarter of respondents also cited a decline in property value as the primary factor behind a short sale. Despite the growth in pre-foreclosure and short sales activity, real estate agents reported encountering a lot of problems in successfully completing pre-foreclosure or short sales. In fact, survey respondents said, on average, one-third of these transactions fail, even though there is a signed purchase and sale agreement. According to the study titled "Mortgage Loss Mitigation in 2008" by Campbell Communications, the significant reasons for these failures are: •Home inspection/damage to property; •The seller would not sign deficiency note on short of mortgage balance; •The seller cannot pay real estate commission and/or HUD-1 closing costs; •The mortgage servicer attempted to reduce real estate commission; and •Appraisal for the buyer's lender is lower than the contract price. One of the biggest obstacles cited by real estate agents in completing short sales is the delay in hearing back from mortgage servicers regarding a potential short sale. On average, home listing agents reported that it takes servicers just over four weeks to provide an answer on a potential short sale, resulting in many potential buyers simply walking away while awaiting a response to their offer. In contrast, mortgage servicers are much faster in providing a yes or no on REO sale offers, as survey respondents reported a response time of less than two weeks on average. Some of the delay in approving short sales appears to stem from a general reluctance by mortgage servicers to accept an upfront loss on a loan. The survey also asked real estate agents to rate mortgage servicers on a number of pre-foreclosure and short sales issues. In the section of the survey regarding how promptly offers are responded to, which is a major obstacle to successfully completing short sales, respondents gave the highest marks to National City Corporation, HSBC Mortgage Services and Wells Fargo Home Mortgage. The lowest grades were given to Washington Mutual, American Home Mortgage and Aurora Loan Services. Mortgage servicers were also rated individually by real estate listing agents in 15 separate categories related to their performance in handling pre-foreclosure and short-sales. In these company report cards, Wachovia scored the best, posting above average ratings in 11 categories. Countrywide Financial scored the worst, receiving above average grades in only two categories. When asked about which incentive to the homeowner would most increase completed pre-foreclosure and/or short sales, survey respondents most frequently chose no adverse report to a credit bureau. For more information, visit www.campbellsurveys.com.