California loan modification plans have slowed down short-sales in the state, but the volume of homes sold for less than the balance of the loans is still abnormally high.  Scores of delinquent home loans have grown much more dramatically than those falling into foreclosure in recent months, shifting the focus of California home buyers away from REO homes and toward short sales, complex deals in which a lender forgives most or all of the seller’s remaining mortgage balance. 

Listing agents have had to learn the ins and outs of such deals since prices began to slide in 2005, and some groups of agents have brought on agents with experience in short-sale negotiations. But the deals have become so cumbersome over the past year that many are ending up with specialists who do nothing but negotiate with lenders.  Homes are selling at a pace not seen in three years, thanks largely to lower home prices and tentative signs that the recession may be easing. At the same time, buyers and real estate agents say the buying process takes longer than at any point in memory, often six months or more in the case of short sales.

Such situations have grown more frequent in the past year, as many as two-thirds of all transactions for some real estate agents. Meanwhile, bank-owned properties’ share of completed sales in Southern California has fallen to about 43% from about 57% last summer, according to research firm MDA DataQuick.  Short sales have become more frequent in part because market prices are generally lower than at any point from 2003 to late 2008. Nearly 43 % of all mortgages in San Diego County exceeded the estimated values of those homes as of June 30, First American CoreLogic reported last month. In the two-county area of Riverside and San Bernardino, that figure was 57%.

Street Russell, director of enrollment at BGS3, a Louisville, Ky., company that negotiates with lenders on behalf of sellers, said California has come to account for about one-third of his company’s new clients. Sellers’ agents hire the company; it typically collects a fee of 1 % of the price when the sale closes. “You guys are going through such a difficult housing market compared to everyone else around the nation,” Russell said.

Such negotiators can be located in San Marcos, Calif., or San Marcos, Texas. It doesn’t matter because they focus on paperwork and phone calls to lenders, agents said. Negotiators’ selling point is that they free listing agents to focus on listing and showing properties. “I’m on the phone all day long,” said Karen Beer, a short-sale negotiator in Murrieta. Beer, who is also a real estate agent, relies on “co-listing” arrangements and splits commissions with the agent whom the buyer initially contacts. It’s one of several business models for short-sale negotiators and specialists.

Remerge Transaction Coordinators Inc. in Irvine uses the same model as Beer, said company owner Shelly Gorenstein. Remerge’s division of labor involves about seven people for a single short sale, Gorenstein said. One, for example, collects the sellers’ financial information and makes the case for a financial hardship.  Such hardships appear to have gotten markedly worse over the last year, while actual foreclosure numbers have risen more modestly, based on reports by CoreLogic. The portion of San Diego County mortgage borrowers whose homes are in foreclosure rose to 2.8 % in June 2009 from 1.8 %, while the Inland Empire’s rose to 5.9% from 3.8%.  But nearly 8% of San Diego County borrowers and about 16 % of borrowers in the Inland Empire are at least 90 days behind on mortgage payments without technically being in foreclosure, up from 5.1 % and 10.8 %, respectively. A short sale can be advantageous for such a borrower because it causes a somewhat smaller hit to the borrower’s credit score.

Short sales have always been more complicated and taken longer than other sales because lenders usually verify financial hardship and determine what an acceptable amount to lose on the property is.  In many cases, a second lender has loaned $50,000 to $100,000 on a property and is being asked to settle for $10,000 or less. Some lenders also demand that the borrower repay a portion of the remaining balance over several years after the deal closes.