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Instead of taking over homes through foreclosure and then selling them, many lenders are agreeing to short sales, in which a home is sold for less than the owner owes on the mortgage. (Joe Raedle, Getty Images / July 28, 2010)

 

Such sales will likely remain routine as the mortgage industry attempts to stabilize, according to the report from Core Logic.

Through short sales, lenders and struggling homeowners agree the property will be sold at a loss, allowing the seller to escape crushing debt or the stigma of default. But in the process, the sellers watch their credit scores suffer and the funds they invested in down payments and renovations disappear.

And with fluctuating home prices, lenders can be reluctant to approve short sales. The transactions can be a hassle to execute, especially when multiple loans on a home mean a slew of creditors are included in negotiations.

Also, lenders have been burned in some short sales when they agreed to a below-market sale price only to see the property resold later at a significantly higher price.

Still, even though the number of short sales is still relatively small, the increase shows that lenders now view the transactions as "a good compromise between foreclosures and trying to ride out the market," said Richard K. Green, director of the USC Lusk Center for Real Estate.

The number of transactions has exploded to more than 160,000 in 2009 from roughly 96,000 the year before. More than a quarter of the transactions occur in California, with another quarter split between Arizona, Texas and Florida.

About 4% of short sales are then resold within 18 months, according to Core Logic. The firm studied the short sales of more than 250,000 single-family residences over the last two years.

Short sales, Green said, could actually end up boosting the job market. Unemployed homeowners who can escape underwater mortgages have an easier time moving around, expanding their job search.

"In 2008, it was impossible to do these sales," he said. "But there's some regulatory pressure to get stuff off the balance sheet. And lenders are less in denial now, coming to grips with the reality that the economy isn't going to snap back."

tiffany.hsu@latimes.com