Why Lenders Are Leery Of Short Sales

As more people fall behind on their mortgages, lenders have been slow to take advantage of a longstanding alternative to foreclosure -- a so-called short sale.
At first glance, a short sale might seem like a win-win for everyone involved. In such an arrangement, the borrower sells the home for less than the amount owed, with the lender forgiving the difference. The sale releases borrowers from their obligations. For mortgage Short sales -- which were rare when the housing market was booming -- can also be a good way for lenders and investors to minimize losses. They typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure, according to a recent analysis by Clayton Holdings Inc., which tracks more than $500 billion in mortgage loans monthly for investors. The costs of foreclosure can include not only legal fees, but also taxes, insurance and the expense of maintaining the home until the property is sold and repairing any property damage.
As the housing market continues to weaken, the number of short sales is edging upward. Short sales currently account for about 18% of home sales, according to the National Association of Realtors. But it can be extremely difficult to get these deals completed. Unlike a traditional real-estate sale, a short sale requires the approval of not only the buyer and the seller, but also the mortgage-servicing company. In many cases, loans have been packaged into securities -- which means that the mortgage servicer must consider the interests of the investors who own the loans.holders, it can be less costly than foreclosing -- and could provide protection against future price drops. For buyers, it can be a chance to buy a home at an attractive price.more....