Short sales occur when the seller’s creditor agrees to sell the home at a value that is lower than the sum of the home loan and the sales costs. In the process the seller’s debt is released to the lender. When there are no buyers to make a short sale possible a lender may accept a deed-in-lieu, where the ownership of the property is transferred to the loan servicer. Both situations only occur in dire circumstances where the only other option would be to foreclose the property.

The compensation given to the servicers in both situations would be up to $1,000, with an additional $1,500 dollars paid to the borrowers for relocation expenses. A time limited to 90 days will be given to borrowers to achieve a short sale, with an extension of up to a year in areas with severe market downturn. If no sale is made the property will be signed over to a deed-in-lieu.

Various safeguards were installed in the administration’s proposal such as a $10 billion dollar insurance program aimed to protect lenders from home-price declines. In addition, to prevent exploitation of the program through the unloading of homes, borrowers must first be deemed unable to get loan modifications. It was also proposed that the homeowner agree to provide the bank with equity reparations once prices start going up again.

The initiative was pleasantly received by many experts as a step forward for market stimulation. As President Obama said, “…everyone is better off, including the community, if people stay in their homes”.

Normally a ‘short sale’ is executed when the seller’s creditor agrees to incur a net loss in the sale of a property after the total of loans and the costs of sale are factored in. The value of the property is less than these costs and therefore the lender agrees to settle for less than the amount loaned by the seller.

While short sales are known as a safeguard for escaping foreclosure, many properties are now foreclosing to avoid massive debt on the part of the seller who is being held liable. This new trend could make sellers vulnerable to being sued for their remaining debt for up to the specified statute of limitations (depending on the state) from the date of the sale.

Some lenders try to remain silent on the issue of ongoing liability; but will retain the promissory note as evidence of the seller’s liability. This constitutes guilt by omission and does not benefit any of the parties involved as when the short sale agreement is finally presented, the sellers realize the risk and often chose foreclosure instead.

This dangerous practice of unwarranted liability has and will continue to cause large, uncompensated expenses in both time and money for sellers, buyers, realtors, and even lenders. Buyers would have wasted various expenses, such as credit reports and escalating appraisal costs. Lenders would often face a property of diminished value (due to damage incurred in the process of a foreclosure) and will have to market the property themselves. Realtors lose valuable time and in the end the seller is left with a foreclosed home. Thus despite the efforts of the realtors, sellers, and buyers, more frequent foreclosures are likely to result in compounding frailties in the homeowner market.