Mortgage Losses under Alternative Property Disposition Approaches: Deed-in-Lieu, Short Sales, and Foreclosure Sales

The loss on a distressed mortgage depends not only on economic and financial conditions but also on the value of the property and how it is transferred to a new owner. Using data from Fannie Mae, we investigate the differences in loss experience across alternative mechanisms for disposing of property (real estate owned or REO, deed in lieu, short sales, and foreclosure sales) from 2003 through 2017. In general, losses are lowest for short sales and foreclosure sales. But these lower losses depend on the overall distress level of the market. The more distressed the market is, the smaller the relative gains associated with these alternative approaches, as compared to traditional REO sales. In contrast, in markets with rapidly increasing distress short sales have lower losses relative to traditional REO sales. We use a variety of matching techniques to address selection issues associated with REO properties and find that the lower loss severities associated with non-REO sales remain.