Proposal would force banks to allow short sales for delinquent homeowners

Major banks may be forced to let severely delinquent homeowners sell their houses for less than the loan amounts owed as part of a broad settlement of federal and state investigations into botched foreclosure paperwork, according to government officials involved in the negotiations.

The requirement to allow so-called short sales would be in addition to forcing mortgage servicers to reduce the amount some homeowners owe on their loans, said two officials, who spoke on the condition of anonymity because negotiations are ongoing.

In Southern California, short sales made up an estimated 19.8% of the market for previously owned homes last month.

Though struggling homeowners escape weighty mortgage debts quickly under a short sale, they don't get away unscathed.

Their credit scores are damaged enough to limit their borrowing capability for years, though the damage is perhaps less severe than in foreclosure. Money for down payments and renovations would be lost, and there may be tax consequences.

The California Assn. of Realtors has been pushing for short sales to be made simpler. Earlier this month, in an open letter in the Los Angeles Times and six other California newspapers, the group called on banks to approve more short sales and for regulators to streamline the process.

For the complete LA Times article: Proposal would force banks to allow short sales