Short Sales Failing in California

Jonathan Lansner writes a really good column/blog in the Orange County Register (Lanser on Real Estate) that never fails to provide insight into the California real estate market.  He has a post this morning about the state of short sales in California that I thought was pretty interesting.

According to the article:

“California real estate agents say that lenders are unresponsive to efforts to sell under-water homes, killing four out of every 10 “short sale” transactions that go under contract, a state survey shows.”

A short sale is when a homeowner with negative home equity is allowed to sell their house for less than what they owe on the mortgage.  The remainder of the debt is then forgiven by the lender.  So for instance, a homeowner may owe $400,000 on a home that is now only worth $300,000.  With the permission of the lender, the homeowner may be able to arrange a sale for $300,000, and the lender forgives the remaining $100,000 that is owed on the mortgage (n.b. sometimes taxes may be owed on the forgiven debt).  This can be beneficial to the lender because they often stand to take a larger loss in a foreclosure than a short sale. It is beneficial to the homeowner because it allows them to get out from under the mortgage.  Short sales generally hurt the credit of the borrower less than if the house was foreclosed.  These types of sales are particularly prevalent in markets such as California, Nevada, Arizona, Michigan, and Florida, all of which were hit particularly hard by the housing bubble.

One of the problems with short sales is that they tend to take a long time, and as noted, the deal often falls through.  Attempts by the federal government to streamline the short sale process haven’t been particularly successful, mostly due to the fact that with the securitization of mortgages, there are multiple parties that need to acquiesce to a short sale (servicers, investors, the home buyer and the home seller) and their financial interests are frequently not aligned to accept a short sale.

According to a survey from the California Association of Realtors, 43% of California short sales that are under contract fall through, and 70% of those responding to the survey said that the short sale process was “difficult” or “extremely difficult”.  Due to the large numbers of short sales in California, it can take a lender more than 35 days to respond to a short sale request, frustrating buyers and sellers alike.

Despite the difficulties, the number of short sales in Southern California has increased in recent years, from 18.5% of all transactions in 2009 to 27.3% of all transactions in January 2011.  Given the large number of underwater properties in California, this number will likely grow in the coming years if lenders and servicers will allow it.