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

In Irvine, part of the hard-hit Southern California market where short sales make up about a third of listings -- Janice Konkol of FirstTeam Real Estate became a mediator between first and second lenders GMAC and Wells Fargo, which were owed about $617,000 and $215,000, respectively.

GMAC decided to negotiate with Wendy and Brian Jurgenson over their $635,000 offer on a condo they rent if Konkol could get Wells to clear its lien for $10,500. But Wells wanted $25,000, and GMAC then agreed to $21,000, Konkol said.

Wells in a surprise move upped its demand to $50,000, before settling on $30,000, including $9,000 in cash from the Jurgensons. Since they live in the condo and don't want to move, the Jurgensons agreed to the terms. They plan to close this week, some seven months after making their offer.

"The first was a cakewalk," Wendy Jurgenson said. "They wanted to go to war for more money, the second. The second really extended the short sale out so long."

DEAL BREAKERS

Short sales have nearly doubled at Wells -- the biggest U.S. mortgage lender -- from January to September, and rising volumes have meant a wider range of situations where more or less may be garnered for second liens, said Jeff Johnson, an executive in the company's servicing business. Unchanged is Wells' policy of negotiating "reasonable" outcomes for all parties in a short sale, he said.

Treatment of second liens in mortgage modifications has also raised hackles of investors who complain that easing terms of a first loan hurts them and helps junior lenders. What's more, top junior lien holders -- Bank of America, Wells Fargo, JPMorgan Chase and Citigroup -- as servicers are overseeing modifications on many first liens, presenting possible conflicts, Amherst Securities Group reported in March.

Frustrations run high for the realtors who say they must handle short sales since the listings are prevalent.

The process is difficult since opinions on property valuations vary widely and banks are trying to limit equity losses after three years of price drops. Buyers often walk away and banks face steeper losses as they move to foreclosure, said Ben Bar of Allstate Short Sales in Woodland Hills, California.

"Seconds are frequently problematic, and sometimes deal breakers," Bar said.

The U.S. Treasury for at least a month has been saying it would soon release guidelines and incentives to speed short sales. Rules will include capping on proceeds to second-liens, Laurie Anne Maggiano, director of policy at the Treasury's Office of Homeownership Preservation, said last month.

Maggiano declined to speculate on the cap but conceded that some lenders may reject it as too low.

"We expect it will create an industry standard for what subordinate lien holders should expect ... and eliminate the stickiest part of the negotiation," she said at a San Diego meeting of the Mortgage Bankers Association in October.