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Short Sales Bypass Foreclosures, Hinting At Hope For Housing Market

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Don't look now, but there's a sign of hope in the foreclosure crisis.

There were more short sales than foreclosure sales in January, according to data from the company Lender Processing Services, as reported by Bloomberg. That could mean lenders are making more of an effort to explore other ways of dealing with the collapsed housing market -- ways that don't involve foreclosing on everything in sight.

In a short sale, the homeowner sells her house for less than what is owed on the mortgage -- and the lender who owns the mortgage agrees to waive the rest of the debt.

A short sale is usually less painful than a foreclosure for the homeowner and the lender alike. That's because homes sold in a short sale tend to fetch a higher price than homes sold as a result of foreclosure.

No one knows how long the foreclosure crisis will last, only that it has already gone on for a painfully long time. Americans are still in financial distress, and banks have spent the last couple of years going over their own paperwork with a fine-toothed comb and slowing the pace of clearing the foreclosure pipeline, so much so that some analysts believe there's at least one more major wave of foreclosures to come.

The ubiquity of foreclosures has kept home values low, thereby depriving many homeowners of wealth in the form of home equity, and it's pushed former homeowners into the rental market, which in turn has made it harder for working-class renters to find places to live.

That could explain why more lenders have shown a willingness to explore alternatives. Besides the rising number of short sales, some lenders are experimenting with a program that allows homeowners at risk of foreclosure to stay on their property as renters instead.

At the same time, lenders haven't entirely abandoned their taste for foreclosure proceedings. Take a recent Bank of America mixup in which the bank foreclosed on a home after advising the homeowner to miss mortgage payments in order to qualify for relief funding.

CORRECTION: A previous version of this article wrongly defined a short sale as a process in which a homeowner sells a house for less than what it's worth. It's for less than what is owed on the mortgage.

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