He'd lost his job. His firm was offering him another job in Indiana.
But he was "upside-down" or "under water" on his mortgage. His lovingly remodeled, four-bedroom house in the Bixby Knolls area of Long Beach was worth far less than the $280,000 he owed. He had bought the house for $295,000 in 1989.What to do?
He took the job in Indiana and turned his house over to a real estate agent. "He gave me the keys and told me to sell the house for the best price I could get," recalled agent Tom Swanner.
Swanner negotiated a "short sale" or "short pay," a deal in which the lender agrees to take less than the full amount owed on the mortgage because the house isn't worth that much.
Swanner, a vice president with Century 21 Results in Lakewood, Calif., now has the house in escrow, after accepting an offer for $190,000.
With the close of escrow, the homeowner will no longer face the monthly mortgage payments.
And the lender? The lender loses about $100,000, but it probably would have lost more if it had tried to seize the house in a time-consuming foreclosure.
It is this win-win prospect that has sparked the growth of short sales in a marketplace where home prices having plummeted by nearly 30 percent during the past four years. The real estate information company TRW REDI Property Data found that two of the leading firms specializing in short sales completed 800 such transactions during the first 10 months of the year.
Swanner said about 10 of his sales each month is a short pay, or 10 percent of his transactions.
Nonetheless, a short sale is generally used only in extreme hardship cases. TRW's 800 total is but a fraction of 1 percent of the 140,000 overall sales it recorded during the first 10 months of 1995. Still, it is a dramatic increase from previous years.
"Prior to 1990, there weren't any," said broker Jack Berger of Realty World Southwest Properties in Long Beach. "When property values were always appreciating, people always had equity in their homes."
Equity is the money property owners have saved in their homes. A homeowner with a house worth $250,000 and a $200,000 mortgage would have $50,000 in equity. However, tumbling home prices have wiped out many homeowners' equity.
A house worth $250,000 only a few years ago may be worth only $175,000 today. Such homeowners would be upside-down or under water on the mortgage. That's not a problem if the homeowners stay in the house. But if there is a divorce, death, serious illness, job transfer or major financial setback, they may not be able to make their mortgage payments.
After being delinquent on payments for about eight to 10 months, they'd face a foreclosure.
A foreclosure would cloud the homeowners' credit records and make it difficult for them to obtain another mortgage, car loan or credit card for as long as seven years.
But a foreclosure is no joy ride for the lender, either. It is a time-consuming process that can increase a lender's losses.
First a notice of default would be filed giving the property owner 90 days to catch up on payments. If not, a notice of a trustee's sale would be posted giving the owner 20 days to pay off the entire balance. If not, the property would be auctioned for at least the outstanding debt or the property would revert to the lender.
The foreclosure absolves the borrower of any more liability for repaying the loan.
Even if the house sells later for less than the balance, the lender is barred by law from seeking a "deficiency judgment" for the difference. Moreover, a foreclosure takes at least 111 days, during which the property owner can stay in the house rent free.
If the lender chooses to go to court to seek what is called a "judicial" foreclosure and a deficiency judgment, the process typically takes at least a year during which the property owner is allowed to stay in the house.
Few lenders take the latter course, said Eric Fagan, a real estate attorney and chief executive officer of Boston Harbor Corp. of San Diego.
While a foreclosure is damaging to the borrowers' credit record, it doesn't result in a tax liability.
That can be the predicament if the borrowers deed the property to the lender or if they negotiate a short sale.
The Internal Revenue Service regards a "deed in lieu" when the property owner gives the deed back to the lender and a short sale as debt forgiveness and taxable income.
For example, if the lender forgives $100,000 on a mortgage balance, the amount would be reported to the IRS on form 1099. The borrowers would be liable for taxes on that $100,000 difference. They would owe the IRS about $30,000.
Boston Harbor is one of the consulting firms advocating a controversial tactic for avoiding that tax liability, credit problems and problems with a balky lender: Fagan advises troubled homeowners to walk away from their mortgage and to deed their upside-down homes to his company.
Boston Harbor charges a fee of 1 percent of the original loan amount. In the example above, with a $200,000 mortgage, the fee would be $2,000.