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Lenders are Reining in Short Sales Aimed at Helping Troubled Borrowers

Following is a summary of an article entitled “Short Sales: A Fraying Lifeline for Homeowners” by Christopher Palmeri for BusinessWeek.

By Ken Holman
“Troubled homeowners may be losing a major lifeline: so-called short sales. To get bad loans off their books and spur home sales, lenders have been forgiving the difference between the outstanding mortgage balance and the purchase price,” Christopher Palmeri writes in BusinessWeek.
Some banks are now balking at such transactions, according to Palmeri.
“Some lenders are forcing the sellers to pay extra money at closing. Others want a promissory note for part of the amount due. The situation could be a setback for the wobbly housing recovery.”
One-third of borrowers owe more on their mortgage than their properties are worth; a record according to research firm First American CoreLogic. Values are still falling, which further depresses prices.
“Since the housing bust, short sales have been a key part of the market. They accounted for 12 to 18 percent of national home sales over the course of the year,” Palmeri writes. Short sales have been a preferred option to foreclosure, especially in areas hardest hit, like Miami and Phoenix.
With bank profits improving, lenders can play hardball, taking on average 9 ½ weeks to respond to a short sale compared to 4 ½ weeks a year ago, according to research firm Campbell Communications. The chain of creditors may also be complicating short sales.
“If a borrower has two mortgages on a house, both lenders must approve the transaction,” Palmeri writes. “And the banks that hold second mortgages may be getting tougher.”
There are no rules in short sales that prevent banks from pursuing additional claims against owners in foreclosure.
“We really need a more organized process,” says Guy Cecala, publisher of Inside Mortgage Finance, a trade publication.
Palmeri writes, “In mid-May, Treasury Secretary Timothy Geitner proposed rules to encourage short sales, including government payments to the lenders.”
However, those rules have not been implemented. And most mortgages are not eligible for federal reimbursement.