by Calculated Risk on 2/18/2010 03:59:00 PM

From Alejandro Lazo at the LA Times: Short sales grow as a cheaper alternative to foreclosure

In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn't worth what the owner paid for it after more than two years of falling real estate values.

Such deals are appealing to struggling homeowners because they escape weighty house debts -- but they don't get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.

Lenders, which can withhold approval of a short sale if they don't like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.

Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation's largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

There is much more in the article. As Lazo notes, many servicers haven't had adequate staff to handle all the short sale requests. And another reason lenders have been hesitant to approve short sales is because of potential fraud.

The Treasury's HAFA program will probably increase short sale activity significantly.

Under HAFA, the lender settles on an approved price in advance. From the directive a lender must provide "Either a list price approved by the servicer or the acceptable sale proceeds, expressed as a net amount after subtracting allowable costs that the servicer will accept from the transaction." This will help speed up the transaction and minimize short sale fraud.

Also under HAFA, the servicer must "allow a portion of gross sale proceeds to be paid to subordinate lien holders in exchange for release and full satisfaction of their liens." That helps with the 2nd lien problem and is great for the homeowner because there will be no deficiency judgment (also, upon closing, the first mortgage holder has to agree to release the borrower "from all liability for repayment of the first mortgage debt"). This is much better than "walking away"!

HAFA starts on or before April 5, 2010. This is an excellent program, but like HAMP, is limited to homeowners with an unpaid principal balance less than or equal to $729,750.