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Large portion of bank settlement used to complete short sales

One of the biggest news items of the year for distressed homeowners was the settlement reached with the nation's biggest mortgage lenders for abusive lending practices. Since that time, over $22 billion has been disbursed to South Carolina and the rest of the country to provide mortgage relief to those who need it.

Although there have been concerns as to how the money would be distributed, a recent report indicates that over half of the settlement money -- $13 billion -- has been used to clear mortgage debts during the short sale process. Funds have been tapped to clear the deficiency between what a person's home is worth and the larger balance they still owe on their mortgage.

Although many homeowners have benefitted from going through with short sales, some observers are worried about the proportion of funds going to reduce the principal -- or outstanding mortgage balances -- on homeowners' first and second mortgages. This would allow people to stay in their homes without selling them.

Regardless, sometimes going through with a short sale is the best way for homeowners to avoid foreclosure. Rather than going through the pain of having their home repossessed, homeowners are allowed time to sell their home at market rates and find a new, suitable residence. This is why it's so important to explore all available mortgage relief options when foreclosure may be on the horizon.

Working through the process of avoiding foreclosure can be complicated. For example, lenders may be able to seek a deficiency judgment after a short sale has been completed. This means that lenders go after borrowers to recoup money they lost on the mortgage when approving a short sale. As banks are criticized for using too much of the settlement money for short sales versus principal reductions, they could consider trying to reclaim their deficiencies.

Fortunately, deficiency judgments can be prevented with thoughtful negotiation during the short sale process. Homeowners can sign an agreement in which lenders waive their right to seek a deficiency judgment in the future. This way, homeowners can feel more secure in their financial situation after completing a short sale.

Source: San Francisco Gate, "5 big banks' mortgage relief progress," Kathleen Pender, Nov. 19, 2012

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