'Short sales,' a sign of housing troubles, start popping up

Some local real estate agents are getting a crash-course in short selling, a process in which financially strapped homeowners ask a bank to forgive part of their mortgage in order to sell the property.

The situation arises when the sale price is less than what's owed on the mortgage and the seller can't afford to make up the difference because of a job loss, divorce, serious illness or other hardship.

Unless the debt is forgiven, the sale won't go through.

The number of short sales is relatively tiny in the region, but they're happening often enough for some brokerage firms to ask attorneys to explain the strategy to agents.

It's a sign that while the local housing market is healthier than in parts of the country where sale prices are plummeting and foreclosures are rising, the area isn't immune to the problems.

"We're not getting inundated with them [short sales] but we do see them now more than in the past," said Joe Farry, vice president and managing broker at Prudential Manor Homes Realtors in Niskayuna.

Home Funding Finders, a mortgage broker affiliated with Coldwell Banker Prime Properties in Latham, recently prepared a six-page handout explaining the basics of short sales.

"The moral of the story is to get the conversation started early if you think you're facing a short sale," said Tom Faughnan, CEO of Home Funding Finders.

The results of a national survey released April 4 by Inside Mortgage Finance in Bethesda, Md., found short sales and pre-foreclosure sales account for 20 percent of closed home sales.

Publisher Guy Cecala said short sales vary by region and are more prevalent in markets where prices have fallen steeply, such as Florida and southern California.

Al Picchi, vice president and general manager of RealtyUSA in Clifton Park, said a short sale can prolong a closing by a month or more.

The lender will require more information about the seller's finances and will check the values of surrounding homes to ensure the owner isn't trying to "ditch" the property by low-balling the price, Picchi said.

Delays in the closing were one of the biggest obstacles to short sales cited by real estate agents in the national survey because potential buyers walk away from the deal.

Short sales have existed in the lending industry for many years. They are more common during a real estate slowdown, when homeowners have trouble selling for as much as they need to pay off the mortgage.

If a homeowner is at risk of foreclosure, the lender must decide whether it's better to forgive part of the debt instead of taking possession of the property.

Gene Sneeringer, a principal at Sneeringer Monahan Provost Redgrave Title Agency Inc. in Albany, said the firm is seeing two to three times the number of short sales today as it has over the past five years.

He emphasized the total "isn't very dramatic" because there were so few in recent years.

Still, there has been an uptick.

"I suspect over the remainder of 2008 we're going to see more short sales because the selling season is just starting," Sneeringer said.

Michael Schafer, a real estate attorney in Ballston Spa, has a handful of local clients involved in a short sale.

One is a seller whose mortgage payoff is $137,000. Even though there's a sale contract for $149,000, Schafer said the real estate agent commissions, closing costs and repairs needed to the home mean the actual purchase price would be $109,000, or $28,000 less than the payoff.

At this point the lender wants to do its own inspection to confirm the cost of the repairs, Schafer said.

Hard data about the number of short sales are hard to come by.

Lenders aren't required to report short sales to the New York State Banking Department. Officials at four trade associations--the American Bankers Association, New York State Banking Association, Mortgage Bankers Association and Greater Capital Association of Realtors--said they don't keep track of short sales.

Officials at four local banks and credit unions--Trustco, Pioneer Bank, SEFCU and Ballston Spa National Bank--said requests for short sales are few and far between, if they get them at all.

But, Sneeringer and Schafer said fewer local banks hold mortgages, preferring instead to sell them to other lenders who service the loans.

The mortgages they do hold typically are with customers who have good credit and job histories. They are less likely to fall behind on monthly payments or be foreclosed upon