Lenders balk at foreclosure alternative

By The Wall Street Journal

As more people fall behind on their mortgages, lenders have been slow to take advantage of a long-standing alternative to foreclosure: a so-called short sale.

At first glance, a short sale might seem like a winning solution for everyone involved. In such an arrangement, the borrower sells the home for less than the amount owed, with the lender forgiving the difference. The sale releases borrowers from their obligations.

For mortgage holders, it can be less costly than foreclosing -- and could provide protection against future price drops. For buyers, it can be a chance to buy a home at an attractive price.

Short sales, which were rare when the housing market was booming, can also be a good way for lenders and investors to minimize their losses. They typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure, according to a recent analysis by Clayton Holdings, which tracks more than $500 billion in mortgage loans monthly for investors.

The costs of foreclosure can include not only legal fees, but also taxes, insurance, repairs and the expense of maintaining a home until the property is sold.

In today's weak housing market, the number of short sales is edging upward. Short sales currently account for about 18% of home sales, according to the National Association of Realtors. But it can be extremely difficult to get these deals completed. Unlike a traditional real-estate sale, a short sale requires the approval of not only the buyer and the seller, but also the mortgage-servicing company. In many cases, loans have been packaged into securities, which means the mortgage servicer must consider the interests of the investors who own the loans.

Deals can fall apart because the mortgage company rejects the price that has been agreed upon by the buyer and seller. A long delay in getting an answer from the mortgage servicer is another obstacle.

The process can be so frustrating that some real-estate agents and homebuyers have decided that a short sale isn't worth the effort. Shari Adams, a paralegal, bought a foreclosed three-bedroom house in Stuart, Fla., after she tried twice to buy a home being sold in a short sale. One deal fell through when the mortgage servicer turned down her offer after six weeks and didn't make a counteroffer. Another deal collapsed because it wasn't clear that the seller was truly facing a financial hardship.

"I basically started to run away from any home listed as a short sale," Adams says.

Low success rate

The success rate for short-sale offers is low, real-estate agents say. Molly Kay Hamrick, the president of Coldwell Banker Premier Realty in Las Vegas, estimates 20% of short-sale offers in the area lead to completed sales, compared with 85% for more-traditional sales.

Redfin, an online real-estate brokerage based in Seattle, says it represented buyers on 65 short-sale offers in the first quarter but expects only two or three to result in a completed sale.

Because so many deals fall through, Jean Manner Schwimmer of Coldwell Banker-Gay Dales in Salinas, Calif., advises buyers who make an offer on a short sale to put a clause in their contract that says the deposit can't be cashed until it is clear that the sale has been approved by the mortgage company and the contract has been signed.

Many borrowers walk away in frustration because it takes so long to get a response from the mortgage company to their offer. Servicers take an average of 4 1/2 weeks to provide an answer on a potential short sale, according to a recent survey of real-estate agents by Campbell Communications, with some taking two months or more to respond. By contrast, it takes an average of less than two weeks to get a response to an offer for a foreclosed property, the survey found.

"To make the process work, you have to have a buyer who just wants that property and is willing to wait three to four months," says Beth Butler, the chief operating officer of EWM Realtors in Miami.

Alicia and Greg Green accepted a short-sale offer in December for a Los Angeles home that they had purchased as an investment. But the deal didn't close until late March because of delays in getting an answer from the mortgage servicer, Option One Mortgage. At least two offers at higher prices fell through because of delays, says Bill Etchegaray, the couple's real-estate agent.

"Luckily, we didn't lose the buyer," Alicia Green says. "I thought we would because the process took so long." The couple sold the home for $299,000, well below the $375,000 mortgage balance. They fell behind on their payments when the construction business that Greg Green owned went under.

A spokeswoman for Option One pointed to the complexities of arranging short sales and said the company was pleased that the sale was successful.

Coming up with what everyone agrees is a fair price can be tricky in a soft market. "Servicers are finding that people try to lowball the sales price knowing that the property is distressed," says Vicki Vidal, a senior director with the Mortgage Bankers Association.

Missed opportunities

But with home prices falling in many markets, a rejected short-sale offer may wind up as a missed opportunity. Donald Schriver, the owner of Assist-2-Sell Good Sense Realty in the Phoenix area, says a homeowner he was helping late last year was offered $190,000 for his house in a short sale but was unable to win approval from his mortgage company. The borrower later decided to abandon the four-bedroom house, which was built in 2005.

The house is now in foreclosure, with an auction scheduled for June. Prices in the area have continued to fall, says Schriver, who believes that the most the home would now fetch is $180,000.

A spokesman for Wells Fargo, which services the loan, said the company "made several unsuccessful attempts to connect with the customer" and didn't turn down an offer for a short sale.

Continued: Tightening the rules

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