A Shortage of Short Sales: Explaining the Underutilization of a Foreclosure Alternative

Calvin Zhang

No 19-13, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The Great Recession led to widespread mortgage defaults, with borrowers resorting to both foreclosures and short sales to resolve their defaults. I first quantify the economic impact of foreclosures relative to short sales by comparing the home price implications of both. After accounting for omitted variable bias, I find that homes selling as short sales transact at 9.2% to 10.5% higher prices on average than those that sell after foreclosure. Short sales also exert smaller negative externalities than foreclosures, with one short sale decreasing nearby property values by 1 percentage point less than a foreclosure. So why weren?t short sales more prevalent? These home price benefits did not increase the prevalence of short sales because free rents during foreclosures caused more borrowers to select foreclosures, even though higher advances led servicers to prefer more short sales. In states with longer foreclosure timelines, the benefits from foreclosures increased for borrowers, so short sales were less utilized. I find that one standard deviation increase in the average length of the foreclosure process decreased the short sale share by 0.35 to 0.45 standard deviation. My results suggest that policies that increase the relative attractiveness of short sales could help stabilize distressed housing markets.

Keywords: foreclosures; short sales; externalities; home prices; mortgage servicing (search for similar items in EconPapers)
JEL-codes: D14 G01 G21 R31 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2019-02-20
New Economics Papers: this item is included in nep-ure
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DOI: 10.21799/frbp.wp.2019.13

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