“Short Sales” an Emerging Trend in Shifting Southern California Housing Market

In a sign that the housing market in San Diego County has returned to earth, analysts say the number of Southern California homeowners seeking mortgage debt forgiveness is on the rise.

According to the San Diego Tribune, such transactions, designed to prevent home mortgage foreclosure, often are called “short sales.”

They occur when home prices fall and California mortgage debt exceeds the value of the property. If the lender agrees, homeowners can sell the depreciated homes and settle their debts for reduced sums.

After the great gains in equity that occurred in the recent housing boom, short sales are something new and, in the opinion of some brokers, scary. If a short sale doesn’t work, it becomes a foreclosure. When prices went up, people all over Southern California got in over their heads.

One was José Padilla, a 28-year-old social worker who used an adjustable-rate loan to become a first-time home buyer last year. He recently decided he no longer could afford to pay his mortgage or the homeowner’s association fees on his three-bedroom condo in Paradise Hills.

Facing foreclosure, he views a short sale as his “best option.”

“I do know it will impact my credit score. It has been quite a setback. I will be feeling this for a while, but as far as the short sale, it is definitely the light at the end of the tunnel. It’s positive for me,” Padilla said.

Analysts describe short sales as an emerging trend. As of November 20, short sales were noted for 55 listings, out of 27,571 total sales.

At Freddie Mac, Robert Padgett is monitoring short sales nationally. So far, they remain a tiny segment of the mortgage company’s portfolio. In its inventory of about 10 million home loans, there have been fewer than 1,000 short sales annually.

“We’re doing a whole lot more loan modifications,” said Padgett, whose job is loss mitigation director. “People are trying to protect their equity. Certainly, as property values flatten and even decline, the likelihood for doing short-payout is going to increase. We haven’t seen it yet, but we are starting to hear the same sort of rumblings you already may have heard, that it is not very far off.”

Critics say lenders helped set the stage for short sales and a recent rise in California foreclosure rates.

Home prices in the county doubled from 2000-2005, building home equity for home owners, but making it increasingly difficult for first-time buyers to enter the market. The California mortgage loan industry addressed the gap between prices and incomes by introducing new adjustable loans.

Lenders enabled more buyers to qualify, but they also raised the risk of default, said Dennis J. McKenzie, a real estate instructor who teaches short-sale courses in Southern California.

“To keep buyers in the marketplace, mortgage lenders had to ‘Mickey Mouse’ the financing, liberalize the financing,” he said. “It’s gotten to the point of no down payment, interest-only loans, negative amortization.”

Many buyers who entered the market at its peak, in November 2005, have realized little or no appreciation.

“It is like a chain letter. The last one in loses.”

In October, the county’s median price was $485,000 for all homes, attached and detached, a drop of 5.5 percent from a year earlier. The inventory of unsold listings in October was nearly 36 percent higher than in 2005. That could be a problem for recent buyers, but most homeowners have amassed plenty of home equity, so analysts say the market isn’t in danger of a sharp downturn.

In late 2005, concerned federal regulators strongly urged lenders to reduce the availability of interest-only mortgage and payment-option loans, which allow borrowers to make minimum payments that are lower than the interest normally due, accounted for nearly 10 percent of last year’s new loans.

Although they’ve been criticized for issuing risky loans that push borrowers into default, lenders don’t view short sales as a good remedy.

Short-sale negotiations with financially distressed borrowers are “kind of an open secret,” said Gary Wong, a senior vice president of Union Bank of California.

“If you are in the industry, you know about it. Is it advertised? No, it isn’t.”