Short Sales Become Bank Foreclosure Shortcut

NEW YORK (TheStreet) -- Banks dealing with lengthy, complicated and frequently messy foreclosures are starting to see "short sales" as a quicker and cheaper way of getting bad loans off their books.

The nation's biggest mortgage servicers- Bank of America(BAC), JPMorgan Chase(JPM) and Wells Fargo(WFC) - are beginning to step up their efforts to ease the short sale process for borrowers who are unsuccessful in getting loan modifications and face the threat of foreclosure.

Servicers are attempting to reach out to borrowers and are paying out more incentives to those suffering financial hardship to help proceed with a short sale. They are also cutting down the time taken to approve short sales, although realtors still complain that the process takes too long.

JPMorgan has processed 120,000 short sales through its proprietary program since June 2009 and now averages 5,000 short sales a month. The bank says its average response time to approve a short sales transaction is 30 days.

"We think the short sale is a good solution for many struggling homeowners and we let them know that it's an option," said Christine Holevas, spokesperson for JPMorgan in an email. "Our outreach efforts have increased in the past year or so. Foreclosure can be an expensive and lengthy process for all parties. It's a good deal for the homeowner and a good deal for us (a cheaper way to get a bad loan off the books.)"

A short sale is seen as a more palatable alternative to foreclosure for borrowers. In its simplest form, borrowers with underwater mortgages sell their homes to a buyer at a price that is approved by the lender. The lender normally forgives the difference between the loan and the sale proceeds- in essence the bank is being shorted for the loan amount.

Previously, lenders were said to prefer foreclosures to short sales because they -- or the investors in the loans -- figured that more money could be made from the former.

But the average time for the foreclosure process- from the time of notice to the completed foreclosure- is now 318 days in the U.S., according to RealtyTrac.