NEW YORK ( TheStreet) --Banks continue to show a preference for short sales over foreclosures as a way of disposing off their non-performing loans. According to the latest report from RealtyTrac, sales of properties in pre-foreclosure- those that have received a notice of default or scheduled for auction- rose 15% in the fourth quarter of 2011 over the year-ago period. In contrast, the sales volume of bank-owned properties (REO) was down 12%.
Pre-foreclosure sales, which is usually executed via short sales, accounted for 10% of all residential property sales in the fourth quarter. "We continued to see a shift toward pre-foreclosure sales, or short sales, and away from REO sales in the fourth quarter," Brandon Moore, CEO of RealtyTrac said in a statement. "Pre-foreclosure sales outnumbered REO sales in several bellwether markets, including Los Angeles, Miami and Phoenix, where REO sales had outnumbered pre-foreclosure sales a year ago. That trend will likely show up in more local markets in 2012 as lenders recognize short sales as a better option for many of their non-performing loans." In the simplest form of a short sale, 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. In cases where loans are sold, investors also need to approve the short sale. However, given the delays in the foreclosure process, investors seem more inclined to accept other alternatives to foreclosure. As TheStreet reported last August, banks including JPMorgan Chase ( JPM), Wells Fargo ( WFC) and Citigroup ( C) have paid out incentives to borrowers to encourage them to consider short sales rather than hold out for a loan modification that may not be possible and risk losing their homes ultimately to foreclosure.