Banks Taking Too Long to Approve Distressed Home Sales, Brokers Say

Apr. 30, 2010 — -- Debbie is one of California's many homeowners who have found they can no longer afford the house of their dreams. Although she stopped paying her mortgage last year, she has found a way to avoid foreclosure: a "short sell" of the house for less than she owes on it.

But even though she has found a qualified buyer, she can't get the bank to approve the sale.

"Why are they sitting on this so long?" says Debbie, who bought her two-bedroom cabin in Modesto two years ago for $250,000. She can no longer afford the mortgage after she lost her job as a financial officer, even as the house has lost half its value in the economic downturn.

"At least we got a buyer," she says.

By selling the house in a short sale, Debbie, who asked that her last name not be used, and the bank will avoid the losses and complications of foreclosure.

Short sales are becoming increasingly common in this economy, with lenders preferring to see distressed homes sold at a reasonable discount rather than left to the ravaging effect of foreclosure.

But as short sales have soared, banks are struggling to keep up with the paperwork, real estate agents say.

"At every bank it's their mantra to say that they didn't receive the application packet," says Ryan Williams, Debbie's broker with Prudential Realty. "So you refax and you refax."

Short sales have jumped in the downturn, reaching 47,000, or 11 percent of all existing home sales, in March, according to the National Association of Realtors.

In states such as California, Arizona and Florida, short sales make up an even higher percentage and some experts argue that the delays are slowing down the housing recovery in those states.

"It does delay the recovery process and prolong the downturn," says Keith Gumbinger, an analyst at HSH Associates, a mortgage research company. "That's a piece of the marketplace that could be performing that is not."

California, with a high percentage of the country's distressed homeowners, has been particularly hard hit by the delays. Prudential's Williams estimates that it takes three to nine months on average for banks to process short sales.

Sellers in other states are facing similar problems.