Lenders balk at foreclosure alternative

Some mortgage-servicing companies are tightening up on short sales because they worry borrowers are rushing into these arrangements when there are better alternatives. In March, Ocwen Financial, based in West Palm Beach, Fla., told its customers it would consider a short sale only after it had talked directly to the borrowers and determined there were no alternatives for keeping them in the home.

"We are concerned that some of our customers are not given all the facts," says William Rinehart, the company's chief risk officer. "In some cases, it's represented to them that a short sale is the only solution to the problem they are in."

Part of the problem may be that many mortgage servicers were ill-prepared for the spike in bad loans. As delinquencies have climbed, they have had to scramble to add staff. Mortgage companies say they prefer other means to help borrowers, such as a repayment plan or loan modification.

Clearing hurdles

Gathering all the information needed to evaluate a short-sale offer can take time, says Patrick Carey, an executive vice president with Wells Fargo. The loan servicer must first determine whether the homeowner really can't continue meeting the loan payments, then get an appraisal or broker's opinion of the home's value.

Mortgage servicers also try to ensure the proposed sale is an "arm's length" transaction between two parties rather than, say, a sale to a relative on sweet terms. They must also determine whether the buyer has sufficient funds or the ability to get a loan.

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There are additional complications if the borrower has a mortgage and a home-equity loan. In that case, both parties must approve the deal, which is a challenge when the sales price may not be enough even to cover the mortgage balance.

To minimize delays, Carey suggests that homeowners contemplating a short sale immediately call their loan servicer to get the approval process started, rather than wait for an offer.

There are some signs that the process is getting smoother. Some mortgage companies have begun to approve short sales for borrowers who can show financial distress but haven't yet stopped making monthly payments, says Dan Elsea, the president of brokerage services for Real Estate One in the Detroit area. Until recently, servicers wouldn't even consider a short sale unless a borrower was at least 60 days late.

Fannie Mae and Freddie Mac, which own or guarantee nearly half of all outstanding U.S. mortgages, both say they are trying to streamline the short-sale process. Fannie Mae says it plans to introduce a policy in the next few months under which real-estate brokers would be given an advance indication of the approximate minimum price that would be acceptable in a short sale, a move designed to quickly weed out offers that are too low.

Freddie Mac says it has already given its top servicers more flexibility to accept short sales for homes backed by loans it guarantees or owns. Lehman Bros., another issuer of mortgage-backed securities, also is offering incentives in some cases for servicers to arrange short sales or loan modifications.

This article was reported and written by Ruth Simon and James R. Hagerty for The Wall Street Journal.

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