Short sales in recent months, in which banks allow homeowners to sell for less than they owe, have surpassed sales of foreclosed homes in California for the first time since the start of the housing crash in 2007, according to real estate research firm DataQuick.
The surge stems in part from last year's national mortgage settlement with the nation's five largest banks. To avoid going to court over foreclosure improprieties, the banks agreed to certain levels of debt forgiveness for underwater homeowners. Short sales count toward those commitments.
Such transactions in California now represent about a quarter of the market, according to the Los Angeles Times, a surge driven by rising home prices, government crackdowns on foreclosures and banks' growing capacity to process the deals.
Lenders have revamped short sale departments, streamlining paperwork, creating new software systems and enlisting newly formed companies as liaisons with borrowers. The incentives for short sales go beyond just economic. Banks face a slew of regulations after revelations of improper foreclosures based on forged or faulty paperwork. Avoiding foreclosure also means avoiding the legal hassle and expense of home repossessions.
Short sales have also become more beneficial for consumers. Banks now typically approve short sales that include deficiency waivers, meaning debt is forgiven. These kinds of short sales are less harmful to credit scores, according to Fair Isaac Corp., which developed the nation's most widely used credit-scoring formula.
For homeowners with hardships, such as job loss or illness, agreeing to a short sale means a waiting period of two years before the possibility of getting a new home loan backed by Fannie Mae or Freddie Mac, compared with three years for a foreclosure.
A homeowner without such circumstances can also get a new loan two years after a short sale with a 20% down payment, compared with seven years for a foreclosure.
Since the crisis, major investors, including banks and government-sponsored mortgage titans Fannie Mae and Freddie Mac, have eased their rules to make short sales easier. New government programs offer more incentives to borrowers and banks, prompting lenders to work with buyers to market properties instead of waiting for offers to arrive.