More turning to short sales to avoid bankruptcy's pitfalls

by J. Craig Anderson - Mar. 8, 2009 12:00 AM
The Arizona Republic

Use of "short sales" is on the rise, according to a recent federal report, but their use remains relatively rare.

Among the delinquent mortgage loans serviced by the nation's 14 largest banks and thrifts, short sales and similar actions totaled 6,908 in the first quarter of 2008, 9,029 in the second quarter and 14,097 in the third quarter, according to a December report by the federal offices of Thrift Supervision and Comptroller of the Currency.

A short sale involves selling a home for less than what the seller owes on the mortgage loan. It requires lender approval and can take months because of the additional scrutiny, negotiating and paperwork requirements.

Scottsdale entrepreneur Travis Olsen said he believes short sales are widely underappreciated as an alternative to the high cost and heartache of foreclosure.

Olsen founded National Short Sale Center as an add-on to his loan-servicing business that specializes in helping distressed borrowers negotiate short sales. He said the high redefault rate among modified mortgages is proof that most loan servicers are not helping borrowers as much as they could.

Olsen said banks have hired more staff in recent months to review and process short sales, as evidenced by a 40 percent increase in lender approvals in the past three months.

A recent survey of real-estate agents by the National Association of Realtors suggests many attempts to represent buyers and sellers in short sales have led to frustration.

Of the 3,530 agents and brokers responding to the survey, released March 1, 54 percent said they had been involved in a short sale in the past year.

Of those, 87 percent said they "faced impediments by lenders or loan servicers," with "lack of response by lender or servicer" cited as the chief impediment.

Phoenix mortgage broker Bob Wasieko said the biggest problem sellers have with short sales is taxes.

The U.S. Debt Forgiveness Act of 2007 declares homeowners exempt from paying income tax on debt forgiven by their lender, as long as that debt went toward the purchase or improvement of a home.

The problem is second mortgages, Wasieko said. Many homebuyers got them, and many used them for other things such as paying off credit cards and buying cars and other consumer items.

If the mortgage lender forgives those debts, the amount is considered taxable income for the short seller.

"You have to prove it was all for the house, or you have to pay taxes on it," he said. "I know of three foreclosures that happened this month because the borrowers canceled their short sales to avoid being taxed."