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Short Sales: How Everybody Loses From Banks' Opposition

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An empty house near Art David's home is stinking up the neighborhood.

The Naples, Fla. house has sat on the market since August 2007, and it's in lousy shape. The water and electricity have been cut off, leading to dead shrubs and thriving mold, and the pool, as David puts it, would be a worthy set-piece for the remake of "The Creature From The Black Lagoon."

"It smells like a rotting pond in the summer time," said David, a real estate agent, in an interview with the Huffington Post.

The home is one of thousands that are languishing on the market and heading toward foreclosure. In many cases, the properties remain unsold because the homeowners were prevented by the banks from completing a short sale -- where the homeowner sells the property for less than the value of its mortgage. Unable to find a buyer to pay the full price, the homes remain vacant until the bank forecloses on the property.

It isn't just the homeowner who gets hurt when a house sits vacant, but rather, the entire surrounding neighborhood is impacted. In fact, a damaged bank-owned property brings down the value of its next-door neighbors by 21 percent, on average, according to a survey of real estate agents by Campbell Communications.

The effects of property damage would be mitigated if banks were more accommodating to short sales, housing experts say.

"One of the best ways to reduce the number of damaged foreclosed properties is for these properties to be sold earlier as short sales," said the survey's author, Tom Popik, in an interview with the Huffington Post. "In many cases that's less of a loss for the mortgage investor and a better situation for the homeowner."

A majority of short sales -- 77 percent -- fail, mostly due to sluggishness on the part of lenders, the survey found. This is despite the fact that losses resulting from short sales average just 19 percent, compared with average losses of 40 percent in foreclosures, according to one study.

Popik's survey respondents reported average wait times of eight weeks before mortgage servicers provided "yes" or "no" answers on short sale offers. Agents said 37 percent of sales failed because the would-be buyer walked away rather than wait around -- a higher percentage than for any other reason. By contrast, asset managers waited on average just 11 days to respond to offers on foreclosed properties, according to the survey.

The Mortgage Bankers Association told the Huffington Post that mortgage servicers just aren't set up to handle the current volume of short sales. The National Association of Realtors said Tuesday that nearly half of all home sales in the first quarter were short sales or foreclosures. Popik found in his November 2008 survey that such sales accounted for 41 percent, with short sales clocking in at 12 percent of all sales.

"Short sales are one of the loss mitigation options banks use to help borrowers avoid foreclosure. Given the state of the housing market, we are seeing more now than at any time in recent memory," said MBA spokesman John Mechem in a statement. "This obviously taxes servicers who are set up to receive and process mortgage payments, not process, manage and approve home sales. When presented with a short sale offer, the servicer has to do its due diligence, both for its own purposes and on behalf of the investor or the entity that actually holds the note or owns the mortgage on the property. Many short sale offers are absurdly low, as potential buyers think they see an opportunity to get a home far below fair market value. Yet each offer must be evaluated, which clogs the pipeline and slows down the process for everyone."

The owner of the home in Art David's neighborhood tried to do a short sale. One of David's clients offered $402,000 in January 2008. It took the banks holding the first and second mortgages three months to turn it down. Now the property is listed at $345,000.

"It makes no sense whatsoever for the banks not to accept a minor loss by comparison to a significant loss down the road," David said. David reports that there are currently 1,548 short sales available out of 9,735 active listings in the Naples area. David said he thinks the government ought to provide some kind of incentive, such as a short sale credit, for lenders to do short sales. "I can't imagine what's going to happen a year from now when these 1,500 properties -- 1,200 of them go into foreclosure, not to mention the ones not even listed. And that's just one county. What's going to happen across the United States?" HuffPost readers: Has the bank foreclosed on your home after dragging its feet on a short sale? Have you given up on a short sale after making an offer and waiting months? Email us your story at submissions+foreclosure@huffingtonpost.com

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