"Short sale" battles weigh on U.S. housing recovery

By Al Yoon - Analysis

NEW YORK (Reuters) - Home equity lenders faced with losses from the U.S. property slump are holding out for more money in distressed sales, slowing transactions needed to support a recovery, real estate agents and analysts say.

These secondary lenders are gaining power in negotiating payments from "short sales," a growing part of the market where homes are sold for less than the balance of outstanding loans.

Short sales are often cheaper for the primary lender than foreclosure and a solution for homeowners who cannot get their payments reduced by federal loan modification efforts.

But the push by these lenders to recover more of their loans is complicating short sales which agents complain can take several months to complete.

The delays have grabbed the attention of the U.S. Treasury which is writing rules it hopes will smooth the process as it tries to help fix the housing market.

The fallout, a legacy of the era of easy credit when multiple loans were encouraged, comes as U.S. housing is struggling to maintain a nascent recovery in prices.

Analysts fear the first signs of a recovery in demand may drop back during the typically slow selling months of the U.S. winter just as banks put to market thousands of foreclosures delayed by the scramble to make loan modifications work.

For short sales graphic, please click on following link: here

NO LONGER SECOND FIDDLE

Secondary lenders provide second mortgages and have second claim on an asset following the first mortgage provider.

In theory, secondary lenders should receive nothing if a short sale doesn't cover the balance on the first loan, said Thomas Lawler, an economist in Leesburg, Virginia.

The rub is that these so-called second-lien, or junior, lenders must release their claim for a short sale to occur, giving them leverage to demand a larger share of what they are owed. Negotiations are often marked by delays that slow sales needed to clear housing inventory overhanging the market.

"Many first-lien holders have become more willing to agree to short sales to reduce losses," said Lawler, founder of Lawler Economic and Housing Consulting.

"Second lien holders know this ... they don't have much of an incentive to agree to a short sale and get nothing."

Some second-lien holders are now asking for 10 percent of short sales, up from payoffs of just $1,000 to $3,000 a year ago, said Angel White, an agent at 360, which currently lists more than 200 short sales from San Francisco to San Diego.