Since suffering home sellers cannot pressure banks to move short sales along, the Treasury Department has stepped in to help move short sales and mortgage modifications onto a faster track.

Based on National Association of Realtor (NAR) statistics, almost 500,000 home sales this year were short sales. This represents a national average of almost 10% of all home sales. In South Florida, California, and Las Vegas, which were hardest hit by the housing crunch, the numbers of short sales are well above that national average.

Considering that the typical short sale never takes less than 3 months, and usually closer to 6, to conclude, anything that expedites the time frame will be appreciated. At the moment, more than 650,000 homeowners are enrolled in the Making Home Affordable program that is designed to take some of the pain out of short sales and home loan modifications.

At the current moment, only about 1,700 homeowners have managed to complete the home modifications sponsored by the Obama Administration. However, Herald-Tribune.com says the Treasury Department expects that figure to move closer to 375,000 before the end of 2009.

The Treasury’s plan to help home sellers to expedite short sales will be appreciated by both sellers and buyers alike; the frustrating wait that goes along with short sales causes almost 80% of these contracts to fail.

What also complicates matters, and prolongs short sale negotiations, is that lenders constantly argue over sales prices, what their share of the proceeds should be, and whether or not to hold the borrower accountable for uncollected debt.

New requirements will alleviate this problem, as well as the time factor. Under the new government rules, lenders will be given only 10 days to approve or disapprove the terms of the short sale. In addition, they must release the borrower from responsibility for any unpaid debt. Realtors will also have more incentive to handle short sales, because under the new rules, lenders can no longer arbitrarily reduce sales commissions,

While banks may hem and haw over short sales, Reuters says they lose far less money than they would if the houses were to go into foreclosure.

Knowing that they will not have debt hanging over them, more owners may opt for short sales because the credit hit from that process usually lasts only 2 years. However, should a bank foreclose on a borrower, his or her credit will be adversely affected for at least 10 years.

The administration’s new efforts to push short sales and loan modifications will include closer analysis of the larger mortgage banks on daily basis. Also, The Washington Post says the government has vowed to publicize and thus, publicly shame banks that are not performing in a manner the Treasury Department deems worthy. The first such culprits are expected to become part of the news by next week. In addition, the bonus payments of $3-4,000 that will be paid to loan servicers for each family served will be withheld until the loan modification made to a family becomes permanent.

While this short sale and mortgage loan modification plan looks great on paper, there is one major short fall: mortgage servicing companies are not required to put this program into effect until April 5, 2010.Until then, we have to hope banks will play fair and act on their best behavior.

The Obama administration on Monday set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. The announcement can be found here.

The new federal guidelines address barriers that have often sidelined short sales by setting limits on the time it takes a bank to approve an offer, freeing borrowers from debt and capping claims of subordinate lenders. New financial incentives for completing short sales or similar “deed-in-lieu” transactions — in which the deed is simply transferred to the lender — include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said. Borrowers would also receive $1,500 in relocation expenses.

While a short sale may be preferable to a foreclosure, they have been frustrating for borrowers, buyers and Realtors, because they are often hung up by lengthy negotiations with multiple lien holders and mortgage insurance companies. Realtors have complained that sales fall through as lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.

Under the new rules, mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt. The rules also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.

Ostensibly, the federal guidelines apply only to banks and lenders subject to federal banking oversight. That means big boys Bank of America, JP Morgan Chase and Wells Fargo, but not necessarily local and state chartered banks who remain free to be as unreasonable as they want in short sale transactions.

This will help, but by how much remains to be seen.

Seth and Crystal Grotzke, both 25 years old, recently bought a bank-owned two-bedroom, two-bathroom townhouse in Edina, Minn., for $110,000—when similar homes in the same development were selling for as much as $131,000. But exactly one day before the scheduled July closing, the Grotzkes learned there was a second, unpaid mortgage. Because of the foul-up, the couple was forced to live in Mr. Grotzke’s boss’s basement for more than a month. They finally closed on Aug. 31.

“We knew there would be title issues, but none that would last for that long,” says Mr. Grotzke, an assistant pastor. He adds that buying a foreclosed property is a way for God to “teach you patience.”

Matt Slaby/Luceo for The Wall Street JournalAlisabeth and Colin Shearn bought this seven-bedroom house outside of Denver in a short sale.

Lots of home buyers are learning about patience these days. In August, nearly a third of overall housing sales were distress sales, according to the National Association of Realtors, up from 18% in March 2008, when it began tracking such sales. The figure includes both foreclosures and so-called short sales, in which the lender agrees to accept less than the full balance of a mortgage in order to unload the property.

In some parts of the country, such as Bakersfield, Calif., Las Vegas and Lakeland, Fla., distressed properties constitute half or more of all sales. So far this year, there have been nearly 411,000 sales of U.S. properties in some stage of foreclosure, according to RealtyTrac, which publishes a national database of homes in default, auctions and bank-owned homes.

Those numbers aren’t making it any easier to buy distressed property. Bidding wars are erupting for the lowest-priced foreclosures. Experienced investors with cash are elbowing aside first-time buyers who need mortgages. And banks generally sell property “as is,” without the defect disclosures required of other owners. Short-sale buyers, for their part, often face delays of weeks or months as they wait to hear back from lenders—and from the institutional investors who bought securities based on the mortgages.

Vandalized Properties

Distressed-property buyers also often have to cope with the fallout from the ruined lives of previous owners, such as vandalized properties and liens from second mortgages, taxes, unpaid water bills, homeowner-association dues and court judgments. For all that, final sale prices often aren’t significantly lower than average in some areas, because the foreclosure glut has also driven down prices for sellers who aren’t in default.

Buyers have to be thoroughly prepared by securing financing in advance and making sure they have a strong stomach, experts say. They should seek out agents with extensive experience and training in distressed property because the transactions are often complicated and time-consuming. Pushing and prodding bank officials, loan servicers and others is a big part of the job.

Colin and Alisabeth Shearn of Cherry Hills Village, Colo., a Denver suburb, managed to snag a seven-bedroom Mediterranean-style house in a short sale for $1,272,000, more than $900,000 below its original listing price in 2007. By the time they bid on the house last February, it had gone unsold for nearly two years and the price had been reduced to $1.5 million from $2.2 million. The couple closed on the purchase at the end of May, and moved in with their two preschool-age children.