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Short Sales is in the Rise

As the number of borrowers falling behind on their mortgage payments climbs to the highest level in five years, the number of "short sales" is increasing.

In a short sale of a home, a lender allows the property to be sold for less than the total amount due. In many cases, the lender forgives the remaining debt.

Short sales fell out of favor when mortgage delinquencies were low and rising home prices made it easy for borrowers who ran into trouble to sell their homes or refinance their mortgages. But as the housing market cools, interest in short sales is increasing.

Bank of America says it saw short sales of homes increase 25% last year, albeit from relatively low levels. In San Diego, the number of entries in the local multiple-listing service that include the words "short sale" has climbed to 129 from 50 a little more than a year ago, according to Sandicor, the local multiple-listing service.

The renewed interest in short sales comes as mortgage delinquencies climbed to 2.51% in the fourth quarter, according to Equifax and Moody's Economy.com. That's up from 2.33% in the third quarter and the highest level since a recent peak of 2.53% in the first quarter of 2002.

Economists attribute the increase in delinquencies in part to a weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates. In addition, as demand for mortgages softened, lenders loosened their standards and made riskier loans.

For a lender, a short sale can be appealing because the process can be shorter and less costly than foreclosing, especially in a declining market. Lenders can avoid the costs of property maintenance, utilities and homeowners' association fees. Properties that go into foreclosure can take longer to sell, particularly in a declining market. There's also the chance that the property could be vandalized.

For borrowers, a short sale is a way to avoid having a foreclosure on their credit report. A short sale can be less of a black mark than a foreclosure on a borrower's credit record because it indicates that the borrower was working with the lender.

But there can be downsides as well. Under certain circumstances, the debt forgiven by the bank may be taxable to the borrower. What's more, convincing a lender to go along with a short sale can be difficult. Borrowers who have a mortgage and a home-equity loan may also have to negotiate with two lenders or two departments of the same bank.

"There are all sorts of logjams," says John Izzo, a real-estate agent in Las Vegas. Mr. Izzo says he is currently working on 19 short sales, but figures just "one in five might be successful."

This article is posted in the Real Estate Journal.