US banks take hit to clear home loan books

Short sales are expected to climb sharply this year as home values continue to fall in some parts of the US, leaving many borrowers owing more on their mortgages than their homes are worth.

As moratoriums on mortgage payments and temporary loan modifications expire in coming months, the number of homes entering, or in, foreclosure is also expected to climb to a record 4.3m, from 3.4m in 2009.

The appeal of short sales for banks is smaller losses. Compared with foreclosures, banks say they lose 20 per cent less on short sales.

After spending most of the past year focusing on largely ineffective loan modification plans, BofA, Wells Fargo, JPMorgan Chase and other lenders said they were ramping up short sales as a means of dealing with the housing crisis.

"If 2009 was the year of the loan modification, 2010 will be the year of the short sale," said Jim Klinge, a real-estate broker in San Diego, California.

Some of the largest mortgage servicers are scrambling to make the most of this shift. Wells Fargo is holding seminars to teach real-estate brokers how to conduct short sales. Citigroup created a unit to expedite short sales and recently announced a pilot programme that gives homeowners who turn in their deed to the bank - known as a deed-in-lieu transaction - at least $1,000 towards relocation expenses.