Short sales an alternative to foreclosure

Some homeowners struggling with mortgage payments are opting for a dose of strong medicine to cure their financial ills: a short sale, in which the lender agrees to accept less than what is owed, to remove the house from the books.

In a short sale, both the homeowner and the bank lose money. But the seller's credit isn't damaged as badly as it would be with a foreclosure, in which the lender seizes and sells the property - typically at an auction that begins with a bid equal to the outstanding loan balance, accrued interest, and any fees connected with the sale.

The number of short sales occurring in this region isn't known - these transactions are recorded no differently than any other sale. But about 20 percent of home sales nationwide now are short sales, according to the results of a survey commissioned by the newsletter Inside Mortgage Finance.

In interviews, several people involved with short sales locally called the lender-approval process that accompanies them long and frustrating.

It took Jennifer McMahon, 41, and her husband, Christopher, 42, from May 2007 to March 2008 to persuade Countrywide Mortgage to agree to a short sale on the five-acre farmette in Glenmoore, Chester County, that they had bought for $379,900 in 2006.

"This was our dream home," Jennifer McMahon said. "When we started, our credit was really good, and even though this kept us out of foreclosure, we've lost a ton of money."

They made some bad decisions, she acknowledged, and got caught in a vise as their 9.95 percent adjustable-rate subprime mortgage began to adjust and their property-tax bill skyrocketed. To make payments, she even liquidated a $15,000 retirement-savings plan, "and I was penalized by the IRS for doing that."

Last month, the McMahons closed on the sale of their house to an out-of-town investor, according to their agent, Nicholas Vandekar of Long & Foster Real Estate. Countrywide settled for $316,000 of the $360,000 owed.

As it happens, the McMahons had not sold their old house in Malvern, which they were renting to cover its mortgage and tax bills. They have moved back in.

In this region, where home values have been holding relatively steady and people typically don't carry more debt than their house is worth, "any homeowner choosing between foreclosure and short sale is just picking his poison," said Farah Jiminez, executive director of Mount Airy USA, a community-development corporation that does foreclosure counseling.

"Both will kill him, just in different ways and at different rates of speed," Jiminez said. "A foreclosure, being slower, gives the homeowner more time to regroup, but also means many years of poor and compromised credit. A short sale means the homeowner may be forced out of the house sooner, but if buying a new house is important, he might be able to revisit this in a couple of years."

A short-sale proposal can be initiated by the homeowner. Or, when the final price offered doesn't cover the mortgage debt, "a listing agent may be the one to start the dialogue . . . about whether the lender would be amenable to accepting a short payoff," said Noelle Barbone, regional operations manager for Weichert Realtors.

Some local agents said first-time buyers and others looking for primary residences were among those picking up short-sale properties. But the more prevalent examples point to investors as buyers.

"Sometimes, [an] investor has more ability to wait and endure the short-sale process," said Art Herling, Long & Foster's regional vice president. "A regular buyer will usually pay more but can't stand the emotional hassle of waiting months."

A deal almost collapsed for Coldwell Banker agent Kristen Foote recently because the lender postponed settlement of a Northern Liberties short sale four or five times. "In this market, it's easy to lose a buyer," Foote said.

Frank Garofolo, 69, of Narberth, a retired corporate headhunter, recently bought a short sale in Newtown Square through Long & Foster agent Steven Seymour. The lender was owed $540,000 but accepted $325,000, Seymour said.

"I was looking for that kind of buy for a while, but real estate prices were too high for the market," said Garofolo, who has done several such deals and would do more if lenders were more accommodating.

"I'm not in it to make a fortune," Garofolo said. "But I've also seen a lot of houses where the banks are trying to make a killing, and they want too much money for what they're selling."

In the national survey done for Inside Mortgage Finance, the 3,000 real estate professionals responding gave Wachovia Corp. the highest marks for willingness to work with troubled borrowers.

Ron Tremblay, Wachovia's senior vice president of mortgage and retail credit, said the bank had 50 teams nationwide trained to quickly ascertain the value of property targeted for short sales and able to appraise payoff offers.

That way "there is usually just a 24-to-48-hour turnaround" in decision-making, Tremblay said. In the current market, with so few buyers, the decision has to be quick or team members "will be ones who will have to sell the property."

Countrywide was rated the worst in the survey. Telephone and e-mail requests seeking a comment, made over several days to Countrywide's Calabasas, Calif., headquarters, went unanswered.

Bruce M. Sattin, a Lawrenceville, N.J., lawyer who has handled short sales and foreclosures, said many lenders appeared averse to risk. "The old aphorism - when your only tool is a hammer, every problem looks like a nail - seems to apply," he said. "The only tool they think they have is foreclosure."

Until recently, one downside to a short sale, as well as to a foreclosure, was that the seller could be liable to federal income tax on the difference between the sale price and the lender's loss, said Bruce Witt, a Weichert agent in Fort Washington.

In December, Congress enacted the Mortgage Forgiveness Relief Act, which excludes from taxation, in most cases, "qualified principal-residence indebtedness." The exclusion is retroactive to Jan. 1, 2007.

Jennifer McMahon has a full-time job as a church children's ministry director. Christopher McMahon is a self-employed remodeling contractor, and many lenders consider him a risk. Still, a subprime mortgage might not have been their only option in buying the now-relinquished Glenmoore home, said Fred Glick, a Center City mortgage broker and Realtor.

"The alternatives would, of course, have depended on their credit score, but they could have gone for a Fannie Mae Stated-Income Loan, for example, and gotten a much lower rate," he said.

Jennifer McMahon said the couple never should have been approved for the mortgage they got. They bid too high, she said, in a market that was stable.

"We went in with good credit, and we came out completely trashed."