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RISMEDIA, March 7, 2008-(MCT)-What do you do if you’re a single mother who can’t afford your mortgage payments of more than $3,700 a month, but can’t sell your house for anywhere near the amount you owe on the mortgage?

That’s the dilemma facing Anna, a Bergenfield, New Jersey, woman who bought her Cape Cod, no money down, for $445,000 two years ago. Now, in a much slower market, her real estate agent says she’d be lucky to get $380,000.

The solution for Anna, who asked to be identified by her first name only, is the one being used by an increasing number of distressed homeowners: a short sale.

In a short sale, the bank or mortgage company accepts less than is owed on the mortgage, to avoid foreclosure, which is an expensive, time-consuming process that badly damages the homeowner’s credit rating and leaves the lender with a house it doesn’t want.

The number of short sales is on the rise nationally, though they still make up only a small fraction of all sales.

“The values of a lot of these houses were inflated as a result of the real estate boom. Now we’re in a bust. The values aren’t there. It’s all starting to catch up with everyone,” said Frank Ciambrone, a Rochelle Park, New Jersey, real estate lawyer.

And it may be getting worse. Bob Caruso, national servicing executive at Bank of America, said requests for short sales have accelerated over the past year.

“We expect 2008 to be a very tough year, especially if the job situation worsens,” Caruso said. “It’s one thing to have house prices decline, but if unemployment increases, that’s really a deadly mix.”

Many homeowners now seeking short sales had interest-only or adjustable mortgages, which keep payments artificially low in the first several years. And looser credit standards over the last few years meant lenders wrote mortgages for buyers who might not have qualified in other times.

“A lot of people making $80,000 a year were buying $600,000 houses because of the interest-only loans and teaser rates that were in place,” said Angelo DiIanni of New Century Realty in Clifton, New Jersey. But eventually the interest rates adjust upward, and the homeowner has to start paying on the principal.

“I don’t know how some of these people got a mortgage to begin with,” said Jeff Bennett, owner of New Jersey Home Relief in Wayne, a company that works with short sellers.

Some homeowners got into trouble because they refinanced to pull out home equity as values soared from 2000 to 2005. Now a lot of that value has evaporated.

And many were hit by bad luck: divorce, illness or lost income.

Anna was affected by several of these factors. She owns a retail store, but sales have dropped. And her marriage recently broke up. In addition, her interest-only mortgage started out with reasonable monthly payments, but she realized the payments would rise soon to unaffordable levels.

For all these reasons, she reluctantly decided to give up the house and move in with relatives in the Bronx.

“It’s painful,” said Anna. “My children are not really happy, but we had to make this change.” She recalled her work to fix up the house-she added a fence and renovated the kitchen. But she decided a short sale was the right choice because at least “I’m not just waiting for a foreclosure; I’m trying to do something to help the lender and to help myself,” said Anna, who is working with agent Mirian Ramos-Garcia of Century 21 Mainstream in New Milford, New Jersey. Her house is on the market for $380,000.

Another short seller, a Lodi, New Jersey, woman who asked not to be identified by name, owes $620,000 on her two-family house, which she bought in 2006. She’s a saleswoman who works on commission, and got a so-called stated income mortgage-one where the borrower is not required to offer proof of income. She said the mortgage broker encouraged her to overstate her income to qualify for the loan.

But when her commissions slowed down, she found she could not afford the monthly payments of $6,100, even with her tenant’s rent check. She found a buyer willing to pay $525,000-which she said was in the market range for the house-but in the long wait for approval from her lender, the buyer gave up on the deal. Now she is looking for a new buyer.

“I’m partly to blame,” the homeowner said. “I should have known better.” But she thinks the lender should have known better, too: “I should never have been able to get that loan, and I’m sorry I did.”

Lenders are taking steep losses on many of these short sales. Sal Poliandro of RE/MAX Properties in Ridgewood tells of a Hackensack short sale in which the homeowner owed $650,000, because he refinanced to pull out equity at the peak of the boom market. But the monthly payments were impossible.

“The seller’s goal was to stop making payments without ruining his credit and his life,” Poliandro said.

The house ultimately sold for $430,000-$230,000 less than the amount owed on the mortgage.

Poliandro is also seeking to do a short sale on a rental home he owns in New Milford that is on the market for $349,000, significantly less than what is owed on the mortgage. The house was flooded last spring, but has since been repaired.

Bank of America’s Caruso said his company has accepted payments that are 10% to 40% lower than the amount owed, depending on the circumstances and the part of the country. Short sales are more common, and the losses deeper, in distressed housing markets like Florida and Las Vegas.

Washington lawmakers recently acted to ease the tax burden on short sellers. Formerly, the amount of debt forgiven by the lender was considered taxable income to the homeowner. But in December, President Bush signed a bill that exempts that amount from income taxes.

Still, negotiating a short sale isn’t easy. Because they take so long, short sales can try a buyer’s patience, and many buyers simply walk away.

Moreover, not all lenders will accept all short sales. Some let the home slide into foreclosure instead. And some will allow the sale and remove their liens from the house, but still demand that the owner repay the full amount owed.

And short sales typically take much more time and paperwork than a regular sale, because they involve not only the buyer and seller, but also the lender. The mortgage lenders demand a lot of proof from the homeowners that they really can’t afford the monthly payments, and aren’t just trying to get out of paying. They also want appraisals showing the house is worth less than the mortgage amount.

As the volume of short sale requests rises, Realtors report that many lenders seem overwhelmed and understaffed, and take a long time to respond.

“It takes a while till you get the right people to talk to,” said Jack Roditi of Weichert Realtors in Tenafly, who has worked on several short sales.

“With some banks and smaller mortgage companies, it’s just difficult to get them to look at the offer and make a decision,” said Mary Ann Sgobba of ERA Realty Center in Totowa.

© 2008, North Jersey Media Group Inc.
Distributed by McClatchy-Tribune Information Services.