Nineteen months ago, the recession took Bob Walker's job. Then, creditors lined up to take the three-bedroom hilltop home that the computer consultant shared with his wife, Stephanie, a playwright still looking for her first break.
Avoiding the stigma and financial fallout of foreclosure became an obsession for the Walkers. They talked to the banks, found multiple jobs, put their Silver Lake house on the market and tried to stitch together a plan to repay their debts. Finally, they turned to a short sale, chronicled in a popular blog: Love in the Time of Foreclosure.
"We really thought that, worst-case scenario, we will sell the house and break even," Stephanie Walker said. "But it didn't work. We went into great losses."
In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn't worth what the owner paid for it after more than two years of falling real estate values.
Such deals are appealing to struggling homeowners because they escape weighty house debts -- but they don't get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.
Lenders, which can withhold approval of a short sale if they don't like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.
But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.
Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation's largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.
Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.
Late last year, the Obama administration added incentives to get short sales done if a borrower is unable to qualify for a modified mortgage as part of the government's $75-billion effort to help troubled homeowners. Starting in April, the government will pay incentives to lenders and borrowers when a sale is completed.
Many economists view short sales as a way to address a problem that mortgage relief hasn't fixed: properties that are "under water," carrying more debt than the home is worth.
"Making short sales easier would go a long way to freeing up the market," said Richard Green, director of the Lusk Center for Real Estate. "Right now, if people are under water on their house, they are really stuck."
Short sales remain difficult. Uncertainty over home prices makes properties hard to value, lenders are understaffed and multiple loans on a home can trip up negotiations among creditors.
The Walkers faced some of these challenges. The couple paid $799,000 for their home in 2006, taking out loans from Countrywide Financial Corp. and National City Corp.
They spent most of their savings and ran up big credit card balances to redo their kitchen and landscaping. Even with her husband's $240,000 yearly salary, they were stretched thin making combined mortgage payments of $5,000 a month, Stephanie Walker said.
When Bob Walker's consulting contract was canceled, the couple fell behind on their house payments. They found jobs but their income suffered.
They listed the home for $875,000 but found no buyers. A foreclosure notice arrived. They were offered a three-month payment reduction from Bank of America but couldn't afford it. A short sale looked attractive.
One factor motivating banks to go along with short sales is that foreclosures typically cost more. Foreclosed properties often sit vacant, susceptible to damage from neglect or vandals. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale.
"The bank or the investor is going to lose money on a short sale or a foreclosure," said J.K. Huey, senior vice president of Wells Fargo Home Mortgage. "You don't lose as much if you sell the property when it is occupied."
Representatives of Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. said their companies had assigned more employees to handle short sales. But the sheer volume of requests has made it difficult to keep up.
"I wouldn't call it overwhelmed," said Matt Vernon, the executive in charge of short sales and bank-owned properties for Bank of America Home Loans. "But the volume has certainly stressed our current process."
Then there's the problem of second mortgages, which have proved to be a thorny impediment to the housing recovery. The loans were widespread during the boom years as people tapped rising equity or financed a down payment.
Of the 1.2 million U.S. properties in foreclosure, about 34%, or 403,670, have a second loan, according to RealtyTrac. In California, with 280,023 properties in foreclosure, about 46%, or 128,800, have a second loan.
"Those junior liens make short sales much more difficult and they make modification much more difficult," said Michael LaCour-Little, a finance professor at Cal State Fullerton who has studied the issue. The different banks "often have no incentive to cooperate."
Sally Quinn's second mortgage has complicated her short-sale attempts.
She is facing foreclosure on a Glendora town house that she bought as an investment property. Quinn said she has tried to arrange a short sale four times through her lenders, Bank of America and JPMorgan. Buyers, tired of waiting months for an answer from the banks, walked away on three occasions, and the banks rejected an offer from a fourth as too low, she said. She lined up a fifth buyer, she said, but BofA balked.
"It all came crashing down," she said.
The Walkers also found the short-sale process to be emotionally wrenching. Weighed down with debt and fearful they would be pursued by the bank that held their second mortgage, they filed for bankruptcy protection last summer.
In her blog, Stephanie Walker wrote that the struggle helped them focus on what was important: their love for each other.
As the blog grew in popularity, Walker hosted online question-and-answer sessions and the couple were featured in media reports. The attention helped the Walkers secure a plan for the future. A reader hired them as caretakers of a home in Washington state's San Juan Islands.
Last month, Walker retired the blog to focus on her next project, a baby due in July, posting: "I don't want my life to be forever tied to our foreclosure story. It's just time for me to move on."