The short sale

guest commentary by Ethan Nobles, director of media relations, Arkansas Realtors Association

For the past couple of years, the term “short sale” has become more common among people discussing real estate.

A short sale occurs when a bank allows a homeowner who has fallen behind on a mortgage sell the home for less than is owed on the mortgage. A short sale, then, if often touted as a preferred alternative to a foreclosure.

There is a problem with short sales, however. Most mortgage companies will only accept a short sale if it has been approved by its loss mitigation department. If that department determines the bank will lose less money by accepting a short sale than it would if a home was taken through the foreclosure process, then the chances are good the bank will sign off on the deal.

While the number of people wanting to go the short sale route has increased, most banks have not increased the size of their loss mitigation departments. That only makes sense – when times are tough, you don’t see just a whole lot of businesses out hiring new employees.

So, here’s what can happen in a short sale. Let’s say Bank A is agreeable to seeing short sale offers presented to Seller B. Buyer C makes an offer on the home and forwards it to Seller B, who sends it along to Bank A for approval.

The loss mitigation department at Bank A is dealing with a stack of short sale offers and is a bit slow in getting around to the offer from Buyer C. After a time, Buyer C gets tired of waiting, withdraws his offer and sends Seller B back to the drawing board.

On May 14, the Barack Obama Administration announced the Foreclosure Alternatives Program which is designed, in part, to speed up the short sales process.

The program is in effect through 2012 and includes standardized documents designed to minimize the complexity and increase use of the short sale option. Also, incentives are built in to encourage mortgage servicers to pursue the short sales route.

Also, mortgagers are encouraged to exercise the deed-in-lieu of foreclosure option if a property does not sell within the time allowed in the short sale agreement. A deed-in-lieu foreclosure is, simply, an arrangement through which the mortgage company takes the deed to the home and releases the borrower from the debt.

Over the past few months, we’ve seen the government take a variety of steps to help mitigate trouble in the housing market in the wake of the failure of the subprime mortgage market, the economic recession and a number of factors that have make it next to impossible for some homeowners to pay their mortgages.

The Foreclosure Alternatives Program is another one of those measures the federal government has put in place and, hopefully, a good number of homeowners will find it to their advantage to use it.

Contact Ethan Nobles at [email protected]