©Stuart Miles - freedigitalphotos

©Stuart Miles – freedigitalphotos

With more and more people finding out that they are underwater on their mortgage, owing more to the bank than the home is worth, they are realizing that selling is not an option for them. Homeowners in this situation are increasingly turning towards short sales, where they sell the home for less than what is owed, and more banks are beginning to consider this option to help homeowners.

However, the increasing rate of short sales is far slower than the overall increasing foreclosure rate. More people are doing short sales in total numbers, but banks are expressing even greater reluctance towards this solution. This may seem counterintuitive for most homeowners, as the banks would be getting back a reasonable amount for the defaulted loan as well as avoiding some of the costs of pursuing the foreclosure.

In fact, the current declines in home values in the real estate market should be enough to convince most banks that getting whatever they can now is better than getting less later on. Banks protect their own financial interests by taking more now instead of risking even larger declines in prices. As well, they are not responsible for the entire cost of the foreclosure process out of their own pockets, as they would be if the home was taken through the legal system and auctioned.

But regardless of this common sense approach, banks are still reluctant to agree to short sales with homeowners facing foreclosure. It can take a month or longer for banks to review and accept an offer, let alone negotiate any further with potential buyers. This causes many of them to walk away, and real estate agents are avoiding working with properties that require a short sale.

Homeowners who have little other option than short sales, because they owe too much or bankruptcy to stop foreclosure is not an option, may also feel pressured to give up on the house. Rather than waiting months for an offer to be approved, these owners may just decide to get on with their lives and begin the process of recovering from a full foreclosure. After all, a short sale is not much better than a foreclosure, because of all the late payments that typically lead up to both.

Unfortunately, neither the banks nor the homeowners may have the last laugh. If homeowners owe $200,000 and the bank turns down a short sale for $170,000, it is not uncommon for the bank to offer that property for sale at $150,000 or lower after the homeowners have been evicted and the bank is forced to list the house on the open market. In cases like this, that are happening all over the country now, no one can be pleased with the results.

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  1. […] Another problematic solution to save a house right now is selling on the open market through a real estate agent. In areas that have been hardest hit by foreclosures, property values have fallen sharply (sometimes by 40-50% from peak prices). This has put many homeowners, even those who had significant amounts of equity, underwater. Few buyers are willing to pay the inflated home prices of 2006, but few lenders are really willing to work with borrowers to complete short sales. […]

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