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Omaha real estate professionals are seeing an increase in the number of short sales — transactions in which homeowners sell their houses for less than they owe on their mortgages as a way to prevent foreclosures.

Lender and seller both take financial hits, but the blow is less painful than a foreclosure, which can damage the consumer’s credit history and burden lenders. The lender forgives the difference between the eventual sale price and the debt that the homeowner still owes — although the seller can be taxed on the forgiven amount as income.

Though Nebraska’s foreclosure rates remain lower than national rates, the local increase in short sales indicates that more Omaha homeowners are facing difficulties.

Apparently no local or national industry groups or agencies tally short sale numbers, partly because companies define short sales differently. But the presidents of Omaha’s largest real estate companies and a nonprofit group that helps people facing foreclosure say they have seen short sales increase in the past year.

The National Short Sale Center, an Arizona-based company that negotiates shorts sales, is receiving 3,000 calls a month, compared with 500 calls six months ago, according to a recent report in Newsday, a Long Island, N.Y., newspaper.

“We can’t grow fast enough,” the company president, Travis Olsen, was reported as saying.

In the past, the term was relatively unknown because short sales were rarely used. They were so rare, in fact, that Larry Melichar, president of CBSHome Real Estate in Omaha, recently offered a special class to his more than 600 agents because many were asking about how to handle short sales.

Third-quarter 2007 foreclosures
——————————————————————————–
NEBRASKA

996 foreclosures

43.7% more than 2nd quarter

Ranks 34th in U.S.

171% more than 367 foreclosures in 1st quarter of 2005*

IOWA

2,207 foreclosures

56% more than 2nd quarter

Ranks 32nd in U.S.

374% more than 466 foreclosures in 1st quarter of 2005*

*First full quarter figures were tracked

Source: RealtyTrac
“Is that a normal education class that we would have had at this company? No,” Melichar said.

Van Deeb, owner of Deeb Realty, said he has seen more short sales in the past year than in his previous 27 years in real estate. He said they’ve become especially common in the past six months.

“Lenders don’t want to have to go through having to take the property back into inventory, so they are doing whatever they have to do to help out,” Deeb said.

Nationally, 0.59 percent of all existing loans entered the foreclosure process in the second quarter of this year — a record, said John Mechem, spokesman for the Mortgage Bankers Association, the national trade association for the mortgage industry.

In Nebraska, the figure was 0.47 percent. Real estate professionals said they expect to see more short sales as more adjustable rate mortgages reset to higher interest rates.

“I believe we’ll continue to have short sales over the next 12 months,” said Vince Leisey, president of Prudential Ambassador Real Estate. “We’re having conversations at least three or four times a week with agents dealing with a sale where their seller needs to go back to the lender to help put the sale together. It’s pretty much a constant conversation that we’re having.”

One Omaha couple’s recent short sale illustrates the situation, said Donna McFadden, director of the home ownership program of Family Housing Advisory Services, an Omaha nonprofit comprehensive housing counseling agency certified by the Department of Housing and Urban Development.

During the boom, the couple combined debt by refinancing a fixed-rate Federal Housing Administration home loan into an adjustable rate mortgage. But when they suffered a loss of income for several months and the loan readjusted to a higher interest rate, they struggled financially and decided to put their home of 18 years up for sale.

“They got into a bad loan,” McFadden said. “Had it been a few years ago, they probably would have had no problem selling.”

But after their home sat for a year, they turned to the agency. The agency advised them of their options, which included a short sale.

Julia Craig, the agency’s assistant director of asset management, said a short sale appears on a credit history as a settlement. Typically, a settlement will fade faster than a foreclosure, so the consumer could possibly buy another home sooner.

Homeowners do have to pay tax on the forgiven debt, but that is more attractive than struggling with a much higher mortgage payment or foreclosure.

In trouble? Don’t wait
——————————————————————————–
Real estate professionals and nonprofit agencies suggest homeowners seek counseling as soon as they foresee problems paying their mortgages. Don’t wait until you’re in a financial bind, they advise. Go to www.hud.gov or call 800-569-4287.
For example, if a lender forgives $10,000 in debt, a Nebraskan might owe $2,500 to $3,000 in federal and state income taxes, said certified financial planner Rick Young, president of Rick Young Financial Services in Omaha.

The bank benefits from a short sale, too. It doesn’t have to deal with owning and remarketing a home — a business it doesn’t want to be in, said Mechem of the Mortgage Bankers Association. A foreclosure costs a bank $40,000 to $50,000, on average, Mechem said.

“When banks do a cost-benefit analysis of a short sale, if they are going to lose $10,000 on a short sale, that’s certainly more attractive than $40,000,” Mechem said. “Lenders have been finding more and more often that it is getting more expensive for them to go through the foreclosure process.”

Craig and McFadden said recent economic factors, such as higher gas and grocery prices and utility bills, are making it harder for homeowners to get approved for refinancing.

“They don’t have additional disposable income,” Craig said.

“The situations were a little more workable a year ago,” Craig said. “We were doing more repayment plans with a client. We were able to get them out of their situation without going into a foreclosure.”

Craig and McFadden said homes are not being appraised as high as a year ago. One client’s home was appraised at $110,000 a year ago but recently was appraised at $92,000.

Deeb said such cases are isolated. Though there might be more short sales than ever, it doesn’t mean Omaha’s home values are dropping — they are holding steady, he said.

“It just means that people paid too much for their house or they are trying to sell it before they’ve had a chance to build equity,” Deeb said.

Melichar, the CBSHome Real Estate president, said short sales are more likely the result of adjustable rate mortgages resetting at higher rates than of home values dropping dramatically. He and Mike Riedmann, president for residential sales at NP Dodge Real Estate, both characterized home values as flat.

The latest figures from the Omaha Area Board of Realtors’ Multiple Listing Service statistics report show the average closed sale price of residential listings through the end of October was $172,335. That figure a year ago was $172,915.

Home sales are still on pace to exceed 2006 by 2.5 percent, a slight deceleration from the pace seen earlier this year, said Scott Strain, the Greater Omaha Chamber of Commerce’s senior director of research. Sales of new and existing homes were flat from August to September, he said.

“We saw a moderation in some activity over the summer, in some of the labor data and some of the housing data,” Strain said.

Prudential’s Leisey said home values have dipped. “Clearly, houses are worth less today than they were two years ago,” he said.

But he echoed the other real estate professionals’ characterization of Omaha’s market as stable.

“Inventories will go down, buyers in marketplace will increase,” Leisey said. “It is a great market to buy in. It will work itself out.”

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