2:00 a.m. June 7, 2009

With an estimated 20 percent of U.S. mortgage holders owing more on their loans than their homes are worth, short sales often represent the best chance for distressed borrowers to avoid foreclosure.

The problem is that many real estate professionals say it’s growing increasingly difficult to complete transactions in which lenders allow sellers to accept less for the home than the outstanding debt. Many pending short sales fall through as buyers grow tired of waiting for loan servicers to complete a lengthy approval process.

“There is an awful lot of paperwork and moving parts,” said Rick Sharga, vice president of the RealtyTrac real estate research firm. “The loan servicers are overwhelmed. There is a huge, huge bottleneck. It’s not at all uncommon to hear a Realtor talk about making an offer on a short-sale home and not hearing back for three months.”

Acknowledging that more needs to be done, Bank of America last week announced plans to “re-engineer” the way it processes short-sale requests. The move represents a major shift in strategy for one of the world’s largest financial institutions.

Typically, processing a short-sale request takes 45 to 60 days at the bank, said David Sunlin, its real estate management executive. Under the new plan, Bank of America hopes to reduce the response time to one week or less.

The impact on the mortgage market could be significant, since Bank of America, with its acquisition of Countrywide Financial, services one in five mortgages in the U.S., officials said.

Banks don’t like to lose money, but consumer demand for short sales is skyrocketing, explained Sunlin. Sometimes allowing a home to sell for less than the outstanding debt is better than going through a costly foreclosure process.

“A short sale is not a one-size-fits-all cure-all but, when it is appropriate, we would agree that it has been underutilized as a tool,” he said. “We are seeing at least twice as many (short-sale) offers this year as last year, and that doubled from the year before that.”

The plan, which will be implemented in 60 to 90 days, calls for the bank to reach out to homeowners and begin working with them as soon as they decide to list a home as a short sale. Currently, the process of evaluating short-sale requests doesn’t begin until a delinquent homeowner approaches the bank with an offer to sell a home for less than the outstanding debt.

Aware of the short-sale bottleneck, the Obama administration is attempting to address the problem through a large infusion of cash. While details of how the plan will be implemented remain unclear, the idea is to give both lenders and distressed borrowers financial incentives to make more short sales happen.

Lenders have been slow to embrace short sales because they don’t like to take losses. Even when they decide a short sale is in their best interest, it can take months to negotiate a price. If there is more than one mortgage, which is common in California, the second, unsecured lien holder must sign off on the sale. That usually means cutting a deal with the first lien holder to share a portion of the proceeds.

In cases where loans have been bundled into securities and sold on Wall Street, things get even more complicated. Investors may need to sign off on the deal.

Part of the problem is that each financial institution has its own method of processing short-sale requests. Unless you are familiar with various servicing companies, working out a deal can be a time-consuming ordeal. A common complaint is that many of the loan officials who work on short sales appear to be learning as they go along.

“It pretty much drives everyone nuts,” said Keith Gumbinger vice president of HSH Associates, a New Jersey company that monitors loan prices. “The Realtors say it is a foot-dragging thing, and nothing can move until you get a decision.”

With all the hassles, it might seem like sellers would be better off going through foreclosure and getting it over with, but that’s not always the case. If homeowners go into foreclosure, their credit often will be so damaged that they won’t be able to purchase a home for five to seven years, said Kurt Wannebo, a San Diego real estate broker who specializes in short sales.

If they do a short sale, they typically can return to the housing market in two years.

Robert Satnick, chairman of the California Mortgage Bankers Association, said he has seen cases in which sales are delayed when lien holders try to maximize their return. Recently, some institutions have pushed to have sellers sign promissory notes that require them to repay all or part of the outstanding loan balance at a later date.

“That is a relatively new wrinkle,” he said. “Where I have seen them come into play is from the second lien holders. I have seen lenders asking the seller to come in with additional money up front. I have seen them approve the short sale but reserve their right to pursue future deficiency from the borrower.”

Santee real estate agent Dan Tacon said he has a standard answer for lenders who seek promissory notes: “No.”

Tacon tells his clients if they can’t walk away free and clear, they probably are better off going through foreclosure.

“If people could afford the payments, they would not be selling the house,” he said. “Why should you pay for something you don’t have? Your credit already is shot. Everything already has been taken away from you.”

In recent months, Tacon said he has grown increasingly frustrated with the amount of time it takes to get short-sale approvals from loan servicers. This sometimes results in vacant homes falling into blight, he said.

Not not everyone sees a worsening problem, however. Erik Weichelt, president of the San Diego Association of Realtors, said he has noticed things loosen up for short sales over the last 45 days.

Michael Corradini of ShortSalePros.com, a short-sale consulting company, said some agents are having an easier time concluding deals because they have developed relationships with loss-mitigation departments. The longer you’re in the business of negotiating short sales, the easier it becomes.

“These lenders are absolutely swamped,” he said. “However, once you get a deal done, you can call that same loss mitigator up and get your file moved to higher priority.”

Despite their drawbacks, short sales are a big part of the San Diego County real estate market. Brian Yui, CEO of Houserebate.com, a San Diego-based real estate company, estimates that about 40 percent of the active listings of homes for sale in the county are short sales.

Under the right circumstances, all parties can benefit. Lenders can avoid the time and expense required to resell a foreclosed home. Neighborhoods are better off because there are fewer vacant dwellings.

One potential downside for sellers is that they sometimes end up with a tax penalty, however. If the property sells for less than the amount borrowed, that difference generally is considered income.

“Whatever the bank loses, they will pass it on to borrowers in the form of a 1099 (tax form) cancellation of debt,” said Wannebo. “But there are exemptions from having to pay taxes. It’s a case-by-case scenario.”

He noted that the Mortgage Forgiveness Debt Relief Act of 2007 offers some homeowners tax exclusions on loans used to purchase their home. Also, if homeowners can prove insolvency, they can be excused from paying taxes on loans or properties.

Recently, the federal government announced new incentives for lenders to work with troubled borrowers. They include a $1,000 payment to loan servicers who complete a short sale or a deed-in-lieu of foreclosure, in which the borrower simply relinquishes ownership.

The program also is offering payments of $1,500 to distressed homeowners to help with relocation expenses after short sales or deed-in-lieu transactions. It will offer payments of up to $1,000 toward the cost of paying second lien holders to release their loans. The U.S. Treasury will pay $1 for every $2 paid by the investors to the second lien holders.

The plan, which is part of the Making Home Affordable program, still is being fine-tuned, said Ron Garber, president and CEO of ShortSalePlan.com, a short-sale consulting firm based in Yorba Linda. Details of how loan servicers will apply for the money and take part in a companion plan to standardize short-sale procedures have yet to be disclosed.

Having all the various players using the same set of guidelines when negotiating short sales would be helpful, said Garber.

“The problem is when you are dealing with a couple of institutions at the same time and there is no correlation between what one needs and the other needs,” he said. “You can’t succeed in chaos.”

Emmet Pierce: (619) 293-1372;

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