Mortgage Rate News

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With the housing market still struggling, many home owners are turning to short sales in an effort to avoid foreclosure. In a short sale, the lender allows the owner to sell the house for less than what is still owed on the mortgage. The idea is that the bank doesn’t have to take over the home and incur costs and hassles associated with a foreclosure, and the seller avoids a foreclosure and has the mortgage debt not covered by the sale forgiven. (Although there are still rather dire financial and credit consequences associated with a short sale). The buyer, of course, gets a good deal.

Normally, lenders are wary of short sales. But things are changing, reports the Los Angeles Times:

Lenders, which can withhold approval of a short sale if they don’t like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.

Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation’s largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

It is important to consider your options before going with a short sale. In some cases, it can actually be better to walk away, going in for a foreclosure (sometimes called a strategic default). However, you should realize that mortgage lenders can still come after you, even after a foreclosure. Consider all the possibilities before you commit to a foreclosure or a short sale.