More Homes 'Underwater' in Struggling Economy

"Hindsight is 20/20," Peacock says. "When she called me and she was in trouble, you know, I felt a little responsible. It was the market, and at that point my goal was to do everything that I could to help her out of that situation."

Peacock laid out two options: foreclosure or a short sale. Sell the house for less than the mortgage owed on it -- if the bank would allow it.

"A short sale is much easier and better on your credit than a foreclosure," said Peacock.

The Business Behind Short selling

But Bruce and Peacock said they had a hard time short selling the property.

"The bank was not willing to talk to our realtor," said Bruce. "She was met with hostility. We were not getting anyplace. We lost one buyer waiting on the bank. That's when we invited the National Short Sales Center to play."

Travis Hamel Olsen said four years ago he saw the writing on the wall. He and some partners opened the National Short Sale Center, which acts as a neutral third-party between homeowners and mortgage servicers to arrange short sales.

Their prescience has paid off.

"Business is going extremely well," said Olsen. "There are a lot of homeowners out there in need of a short sale, and fortunately we are in a position to help them out."

More banks are beginning to accept short sales as a way of stemming its losses.

"It is a win-win solution," said Olsen. "The banks, when they take ownership, contrary to what people believe, they don't' want to do that. When they take ownership, they lose a substantial amount of money. If they accept a short sale, they realize the homeowner is trying to have a proactive resolution to this problem, and the bank loses a lot less money."

Credit Report Clean Before Short Sale

"Short sales were very rare back a couple, three years ago," said Zandi, "and now they're increasingly common."

The National Short Sale Center was able to get the lender's ear and work out a deal so the company would accept a short sale buyer, and let Bruce off the hook.

Through the short sale process, the pain continues. Melanie Bruce had to write a "hardship" letter to her lender, ironically, sharing more financial information to get out of the loan than she did getting into it.

"I had to show surprisingly little to get the mortgage," said Bruce. "So yeah, inversely, when you write this letter of hardship you are really getting into your personal life."

"It is with great embarrassment and regret that I write this letter, as I have always prided myself on being responsible," Bruce said in the letter.

The lender approved a buyer at $66,000 less than the original purchase price.

"I paid $325,000 for it, and the house just sold for $259,000," Bruce said. "It's a real blow to your self-esteem. You could pull out my credit [and see] that everything is paid on time. This is the first blip on my credit report. You see this on the news and you think, 'Well, at least I'm not alone.' But it doesn't change the fact that you're in this situation. It doesn't change the fact that you have to make this decision. And your dream of owning a house has now fallen apart."

In three more weeks, Melanie Bruce and her family joined another burgeoning trend -- they're becoming renters and will walk away debt free.

"It's amazing what you can get for $1,000," she said. "There is one place with this granite kitchen and upgraded countertop. It's beautiful."

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