The majority of home sales in Orange County are of the short sale variety. Of the 6,268 pending sales in Orange County, 3,639 of them are short sales — 58% of all pending sales.

The astronomical proportion of short sales (58%) to foreclosures (8%) and equity sellers (34%) for pending sales is at least partly to blame for the excruciatingly protracted delays in short sale closings. However, brokers and agents in the trenches will be the first to point out that lenders are quite simply dragging their feet when it comes to processing short sales.

Short sales can be extremely complex, particularly when multiple lenders, attorneys and creditors are involved. Multiple prospective buyers all vying for the lowest price can also prolong the sale as the lender takes each offer into account for approval. Even in circumstances where a qualified buyer has made an acceptable offer, they are still stuck waiting while the bank dithers over accepting anything less than a full payoff — which is not going to happen in the current housing market and for years to come.

A vast number of underwater homeowners in Orange County have opted to do short sales. Considering the reluctance of most lenders to take a loss, short sale sellers will have to wait at least six months before their sale finally closes, if it closes at all.

first tuesday take: The short sale is another device forged in the furnace of government rhetoric to encourage moralistic and irrational homeowners to avoid foreclosure. Lenders and the government expect homeowners to do everything they can to ensure the lenders get paid — even if it still means defaulting to get a short sale discussion underway and taking a substantial ding to their credit. [For more information on the credit score impact of short sales and foreclosures, see the June, 2010 first tuesday article, The FICO Score Delusion.]

Yes, homeowners opting for the short sale may preserve a minute percentage of their credit score by avoiding the full force of the many months’ worth of delinquent payments leading up to foreclosure, but it is difficult to see any other motivation for riding the runaway train all the way to the bitter end.

Many homeowners are encouraged to negotiate a short sale with their lender due to the benefit of being able to live rent-free in excess of 12 months. However, completing the foreclosure process shifts the issue of insolvency from the homeowner’s balance sheet to the lender’s. As fearful of insolvency as lenders are in this financial crisis, they will continue to defer foreclosure as long as negotiations for alternatives are taking place.

However, for the homeowner considering a short sale who has an LTV of 125% or more, a strategic default is the answer. A homeowner does himself no favor in delaying this approach to attain personal financial solvency, which is strictly a business decision, due to an unfounded fear of moral turpitude that somehow only homeowners should possess. [For more information on strategic defaults, see the April first tuesday article, Sink or swim: whether to strategically default on a home loan and Fannie Mae, our government and strategic defaults.]

Re: “Broker: Short sale gridlock is dizzying” from the Orange County Register