A short sale's long journey...

With home values falling and a rough economy denting people's wallets, it doesn't take much for a homeowner to get underwater on a mortgage, owing more on the loan than the home is worth. Toss in a personal dilemma or two and the situation can become even more bleak.During the year's second quarter (the most recent data available), one in seven homeowners, regardless of when they bought, had negative equity in their homes, according to Zillow.com. The statistics were worse for people who bought their homes during the market's peak in 2006; 45 percent of those homeowners were upside down.
Kenneth Baldwin is one of those statistics, and it took him months to decide that it was better to walk away from his home with his dignity and credit-worthiness relatively intact than to continue struggling to keep it.In July 2006, with a good credit history but no down payment to make, the then-42-year-old bought a $236,500 three-bedroom, bi-level home in Lake in the Hills for himself and his fiancé. He received an interest-only 80/20 loan. An 80/20 loan is typically two loans—a primary loan for 80 percent of the value of your home, and a secondary loan, sometimes called a piggybank loan, in lieu of a down payment that covers the remaining 20 percent at a much higher interest rate than the first.Then his relationship soured and the terms of the loan reset. Instead of a $1,800 monthly payment covered by two incomes, Baldwin had to fund a monthly payment of $2,200 by himself. He tried to make it work, and found himself stressed when he couldn't make a payment.By the spring, he'd had enough of the stress and decided to sell his home, with his lender's permission, for less than the amount he owed on it in a short sale.

Delinquent borrowers whose homes are listed for sale at a discount and carry the "lender approval required" caveat. Despite what can be a time-consuming approval process, the transactions have become an increasingly popular option.
In May, Baldwin's lender, IndyMac Bank, agreed to let him sell his house for $214,000, forgiving $49,659.60 of the loan. The transaction still will dent his credit record but nowhere to the extent it would have, had he let the house lapse into foreclosure. After the closing, Baldwin received a $5,000 check as a sort of "thank-you" from the lender.
courtesy of Chicago Tribune 10/17/08