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Are You Feeling the Credit Crunch? Consider a Short Sale

In New Jersey, short sales have exceeded REO / foreclosure deals in every month since June 2010. In January, short sales accounted for more than 15% of the 3,033 New Jersey homes sold, compared with 3.9% for foreclosures. According to RealtyTrac, it takes an average 966 days for banks to repossess a home in New Jersey, second only to New York. Both states require timely judicial hearings for foreclosure approval.

New Jersey’s foreclosure rate currently stands at 8.21% (up from 7.74% year-over-year), trailing only Florida’s 14% foreclosure rate. Another 4% of loans in New Jersey are 90 days or more delinquent. The combined foreclosure/severely delinquent rate on New Jersey loans is approximately 12%, third to Florida (18.38%) and Nevada (13.36%).

The Trend Away from Foreclosures and Towards Short Sales

The nation’s foreclosure rates are dropping in large part due to the increase in short sales. The increase in short sales reflects banks’ willingness to sell homes for less than the mortgage amount owed on the home. Unlike the past several years, banks are now adequately staffed to handle increasing short sale volume and lending institutions are more willing to swallow the more manageable loss on a property that is associated with a short sale versus a foreclosure.

According to the most recent statistics provided by Lender Processing Services, foreclosed homes sold for an average of 29% less than non-distressed properties, while short sales sold at a 23% discount relative to non-distressed homes.

Is a Short Sale Right for You? Consider the Benefits

The greatest enemy belying a distressed or “underwater” homeowner is a significant lapse of time. As time passes and monthly payments are missed, the homeowner suffers significant credit deterioration. Bad credit can have a negative impact on a variety of levels, including a person’s ability to buy a future home. Understanding that the foreclosure process generally takes between 3-5 years, the effect of a foreclosure can place an individual’s credit in disrepair for a period that may last up to 10 years.

During the past several years, the difficulty in completing a short sale largely revolved around banks’ unwillingness to take a “haircut” on properties that were “upside-down.” Banks regularly practiced a process known as “extend and pretend” whereby the bank would, in most cases, do nothing, while praying that the real estate market would recover in the near future. Aware that the economy was not going to miraculously come to life overnight, banks have warmed to the idea of working with sellers to instigate short sales. In fact, some banks including Wells Fargo & Co. and JPMorgan Chase have begun giving cash inducements as high as $35,000 to selected homeowners who agree to a short sale as a way of speeding up the process.

Under a short sale, banks recognize a loss on the mortgage, while sellers are able to unload troubling debt without the stigma of a foreclosure or the difficulty of ruined credit. Banks are in the business of lending money and are uncomfortable owning and managing a portfolio of properties. Short sales permit the lender to avoid managing real property, while allowing the underwater owner the opportunity to avoid the financial and stigmatic issues involving a long, drawn-out foreclosure.

Several Potential Burdens to Consider When Discussing a Short Sale with the Lender

Having an attorney is essential to making the most of a short sale. In many situations the lender will make it a condition of agreeing to a short sale that the homeowner sign a promissory note to make up all or part of the difference between the proceeds from the short sale and the amount owed on the original debt. An experienced attorney will negotiate with the lender in order to establish a payment amount that is acceptable to both the debtor and the lender. It is in the best interest of the debtor to have an attorney who has significant experience in negotiating with lenders’ in the foreclosure process. An experienced attorney may have an existing working relationship with your lender and that may provide a significant financial benefit during the negotiation process. It is also worth noting that the amount of debt that the lender forgives could be considered taxable income by the Internal Revenue Service.


Banks are favoring short sales over the foreclosure process. In both the short and long term, short sales produce a mutually beneficial outcome for the troubled homeowner and the lender relative to burdensome foreclosure process. A homeowner who is considering a short sale should contact the lender to discuss the details of a potential short sale. The next step taken should be to consult an attorney who has ample experience in dealing with the short sale process.