NEW YORK (CNNMoney) -- The Federal Housing Finance Agency laid out new rules aimed at speeding up the short sale process, a move that could keep many homes from falling into foreclosure.
In a short sale, the bank that holds the mortgage must agree to accept a price for the home that is less than what is owed. Even though short sales are considered a better alternative to foreclosure, banks often take so long to review and approve short sales that the deal falls apart and homes get repossessed.
"Delays in approving short sale requests remain a significant challenge for realtors and consumers and often results in canceled contracts and the property going into foreclosure," said Moe Veissi, president of the National Association of Realtors.
In California, which accounts for a disproportionate number of the nation's short sales, 60% of short sale offers failed to result in a closed sale last year, according to a California Association of Realtors member survey
The organization attributed much of the closing problems to extended lender response times. Some agents said that lenders even foreclosed on the homes before a short sale could close.
To help avoid the trend from continuing, the Federal Housing Finance Agency, which oversees Fannie Mae (Fortune 500) and Freddie Mac ( ), laid out rules that will require lenders to review and respond to short sale requests within 30 days and make a final decision within 60 days. The lender is also required to provide weekly status updates to the borrower if the offer is still under review after 30 days.,
The new guidelines, which go into effect on June 1, can prove to be beneficial for all of the parties involved.
For lenders, it could mean saving a distressed property from falling into foreclosure, saving them tens of thousands of dollars in lost property value and costs.
The average foreclosure during the last three months of 2012 sold for $149,686, while short sales averaged $184,221, according to RealtyTrac. And foreclosures also pile up higher expenses with lenders paying for property taxes, heating and maintenance costs.
Home sellers, too, would be better off because they often will take just a one-time hit to their credit score for a short sale rather than the multiple delinquencies associated with a foreclosure.
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