Short sales happen when a lender agrees to accept less than the amount owed by the borrower – there is not enough equity to sell the house and pay all the costs of the sale. Some lenders will not consider a short sale if the payments are current, and in addition may try to tap into other accounts where the borrower has assets. Generally speaking, the borrower must be unable to pay the existing mortgage, and the property must be worth less than the borrowed amount.

Short sales come with advantages and disadvantages for both borrower and lender. For the homeowner, short sales will appear as a “pre-foreclosure in redemption” status, which will reduce their FICO by 75-100 points. (Foreclosures will hit someone’s FICO by about 250 points, and can appear up to 10 years later.) For lenders, foreclosures are much more time consuming and costly and in some states the process can take up to 280 days as interest payments go uncollected, taxes pile up, and attorneys and agents are compensated. The structure may be neglected or damaged during that time. On the other hand, selling a property short of what's owed on the mortgage can get an unproductive asset off an investor's balance sheet quickly. Tax-wise, and this is about to change, the IRS treated the difference between what the homeowner borrowed and what the lender accepted to settle the mortgage as income to the homeowner and is taxable. Lastly, not all lenders will accept short sales as a complete solution to the debt owed and a few banks want promissory notes from borrowers that require them to pay the full amount of the mortgage even after the short sale has been closed. In California purchase money loans are not subject to deficiency judgments, but hard money, home equity, and refinances are.

According to the National Mortgage News, land prices in parts of Southern California have plunged by more than 50%. The Hoffman Co., a land brokerage firm based in Irvine, said the largest decline, 52%, was near Murietta, but in West Palmdale and East Lancaster (north of Los Angeles) values of lots have declined by 38%. In Riverside County lot prices are down 42% and in San Bernardino, they are off by an average of 37%.

• Morgan Stanley, the second-biggest U.S. securities firm, reported a fourth-quarter loss of $3.56 billion after a $9.4 billion write-down on mortgage-related investments.
• Colorado regulators have imposed a new rule limiting prepayment penalties on adjustable-rate mortgages in hopes of reducing the state's high foreclosure rate. An emergency rule bars lenders from demanding prepayment fees after a loan is adjusted to a higher interest rate. Stiff penalties for paying off loans early can prevent some borrowers from refinancing when interest rates rise. If they can't afford the higher rate or the prepayment fees, they could end up in foreclosure.

Yesterday, the markets improved after the November Housing Starts and Building Permits numbers came in slow. Mortgage prices improved slightly relative to Treasury securities, and this morning we find ourselves with a 10-yr at 4.10% and mortgage prices a tad better. There is a large amount of maneuvering going on among the European Central Banks, who are trying to improve the credit markets by injection funds into the system, and it has caused European stocks to fall and bond prices to improve somewhat.

YOU KNOW YOU ARE LIVING IN 2007 when...
1. You accidentally enter your PIN on the microwave.
2. You haven't played solitaire with real cards in years.
3. You have a list of 15 phone numbers to reach your family of three.
4. You e-mail the person who works at the desk next to you.
5. Your reason for not staying in touch with friends and family is that they don't have e-mail addresses.
6. You pull up in your own driveway and use your cell phone to see if anyone is home to help you carry in the groceries.
8. Leaving the house without your cell phone, which you didn't even have the first 20 or 30 (or 60) years of your life, is now a cause for panic and you turn around to go and get it.
9. You get up in the morning and go on line before getting your coffee.
10. You start tilting your head sideways to smile. : )
11. You're reading this and nodding and laughing
12. Even worse, you know exactly to whom you are going to forward this message.
13. You are too busy to notice there was no #7 on this list.