Short sales on the rise

They aren't pretty, but they're getting more popular. And banks are getting more comfortable with them, too.

By Kim Peterson Feb 19, 2010 2:20PM
Home-buying guide © Ingram Publishing / SuperStockHomeowners trying to avoid foreclosure are increasingly turning to another option: The messy, convoluted, pull-your-hair-out short sale.

Short sales are soaring in the distressed real estate market. Under Fannie Mae and Freddie Mac, they nearly quadrupled in the first nine months of last year, according to The Los Angeles Times. Other mortgage lenders report a 165% increase.

These kind of sales make realtors -- and buyers -- groan. They're complex and time consuming. But they're a way out of an underwater mortgage.

Here's what happens in a short sale: A homeowner can sell a property for less than the amount owed on the mortgage, and the ensuing credit hit will likely be less damaging than in an actual foreclosure.

The problem is that banks don't have to approve a short sale if they don't like the price, according to the Times. And so short sales involve an extensive amount of back-and-forth between desperate homeowners and banks shaking their head no.

"But that resistance is softening," writes the Times' Alejandro Lazo. "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."

The Obama administration is dangling some incentives for lenders to get short sales done, and some experts tell the Times that encouraging short sales would help free up the market.

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