Are short sales the answer?

Posted by Alan Chokov, Alan Chokov Realtors
With the highly touted federal mortgage-modification program falling short of its target numbers, Washington is starting an alternative effort to slow the rising numbers of home foreclosures using an old process.
It depends on short sales, transactions in which the lender accepts less than the balance owed on the mortgage when the house is sold.
Beginning April 5, under new Treasury Department rules, short sales will be presented as the potential next step for homeowners who are rejected by or fail to make the grade for the federal Home Affordable Modification Program, which critics say is slow and ineffective.
"It's the bureaucracy," said Alan Chokov "They can take months. I even had one go 700 days. Then the person you negotiate with at the banks keeps changing, paperwork gets lost and then it comes down to the wire and it's denied. It's frustrating for the buyer, seller and everyone involved."
RealtyTrac chief economist Rick Sharga said offering the short-sale program is the administration's acknowledgment its current mortgage-modification effort "can't solve the foreclosure problem by itself."
The mortgage modification plan started early last year with a goal of reducing payment for 3 million to 4 million distressed homeowners. Through the end of February, 1.35 million trial modifications have been offered, 1.1 million modifications have been accepted, but only 170,000 are permanent, according to the U.S. Treasury Department. started slow with only 67,000 permanent modifications approved through December. Since then, the process is moving faster with 103,000 approved the first two months of this year.
Program supporters said floods of paperwork the banks and lenders had to wade through, as well as learn a new process, caused the slow start. The new alternative offers financial incentives to participate in short sales, provides limited pay outs for second lien holders and paperwork is more standardized.

The use of short sales has been limited because they tend to be difficult and time-consuming. Nationally just 14 percent of all existing-home transactions in January were short sales, the National Association of Realtors said, even though Volusia and Flagler Realtors and mortgage brokers say distressed home sales and bank owned properties account for 50 to 80 percent of their transactions.
But these days, as buyers race to meet the April 30 agreement-of-sale deadline for the federal income tax credits, time is money.
"It's trying to create a uniform process and requires the lenders to establish a minimum amount it would accept," said Ross.
"There's also more incentives for the lenders," he said.
However, the alternative push for more short sales is not the cure all.
It's still a voluntary program, Chokov said.
It also fails to address the underlying causes of home defaults right now -- high unemployment and tight credit markets, Chokov said.
"I don't see the housing market getting better for 12 to 24 months, not until we reduce the months and months of unsold inventory down to below 6 months," Chokov said. Bob Koslow contributed research to this article.
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