Brett Ellis, a real estate agent in Fort Myers, Fla., was thrilled when he got an offer for a property in Bell Tower Park in May 2008.

"It was a gorgeous property on the corner lot," Ellis told the
Huffington Post. The owner, who had lost his job, wanted to sell the
apartment for a loss rather than go into foreclosure, a strategy known
as a short sale.

The offer was for $350,000, and Ellis, who is a certified distressed
property expert trained in executing such sales, knew it was as good an
offer as he was going to get in this market. He immediately sent the
paperwork into the bank.

He waited for four months. The bank finally told him it wouldn’t
take anything less than $400,000 — a price Ellis was sure he could
never get. In September, the buyers agent called to say, "You know
what, we gotta move on, we gotta buy something else."

Now the property is sitting vacant as it slides into foreclosure.
Its former owners credit is destroyed, and the house is losing value
every day. "God knows what the condition is today," Ellis said, adding
he’d be surprised if the property is worth more than $290,000 when it
resurfaces on the market. Add in the legal expenses involved in a
foreclosure, and the bank cost itself a hundred thousand dollars more
that it otherwise would have.

Its a scenario that plays out constantly, everywhere in the United States. In a time of collapsing real estate values, where one in five homes are now under water,
a short sale is increasingly the only option before foreclosure. It is
less damaging to credit scores and spares the homeowner the shame of
foreclosure.

It is also a better option for banks: According to one analysis,
short sales resulted in loan losses of only 19 percent, compared with
an average loss of 40 percent on homes sold after foreclosure.

So why aren’t these sales more widely used?

The broad answer is that the American financial system simply can’t
handle a collapse of this magnitude. The fates of the banking and real
estate industries are intertwined. But they don’t work together — and
the result is that they end up working against each other.

The more precise answer is related to securitization, the method by
which banks bundle together different mortgages and slice them up and
sell the pieces to various investors. Securitization makes negotiating
a real estate sale that results in a loss nearly impossible.

"The most significant aspect is that so many of the banksmortgages
have been securitized, put together and bundled, sold off to Iceland or
China or some godforsaken place," said Dave Liniger, founder and
chairman of global real estate company Re/Max, in an interview with the
Huffington Post. "The bank has to go through all of the various people
who are stakeholders and it becomes a very lengthy process, and the
bank is turning off the realtors by not even getting answers back to
them, sometimes for months."

Banks have little incentive to untie those bundles. Since mortgages
are listed on the banksbalance sheets at the value of the original
loan, if they complete a short sale they must record a loss on their
balance sheets. That would explain why banks drag the process out as
long as possible. In Elliscase, the property is sitting vacant a year
after the first offer, allowing the bank to list the original value on
its balance sheet all along.

According to research firm Campbell Communications, only 23 percent
of short sale transactions are actually completed. "Three out of four
potential short sale transactions fail, principally because the
mortgage servicer takes too long to respond to the offer," said Tom
Popik, author of a February survey of real estate agents. "When these
same properties are later sold it further depresses real estate prices."

Congress has had as much success untangling this mess as real estate agents.

"We’ve been trying to figure out probably for close to two years now
why so few mortgages are being modified when it seems to make absolute
business sense for the person holding the mortgage to modify rather
than foreclose or to take a smaller loss selling it rather than a
bigger loss foreclosing on it," said Rep. Brad Miller (D-N.C.).

Miller points his finger at securitization. Once the mortgages are
bundled and sliced up into different pieces, known as tranches, the
owners of the pieces get paid back according to a certain pecking
order. Senior investors get paid back first and if theres a loss, the
most junior investors won’t get anything. Its those investors who are
blocking short sales.

"The people with the least senior tranches have no reason to agree
to the modification because they take a complete loss and the people in
the most senior tranches don’t lose anything. So they’ve managed to
structure their mortgages in a way that makes it almost impossible to
modify or sell short," said Miller.

Miller sponsored legislation to reform the bankruptcy code to allow
judges to rewrite those contracts, taking away the ability of junior
investors to sue and encouraging them to negotiate. But the
House-approved measure died in the Senate, 51-45, killed last week by
Republicans and 12 Democrats, leaving it 15 votes short of the 60
needed to overcome a filibuster.

Dave Liniger of Re/Max said the provision would have changed the
bargaining landscape. Lenders would have had much more of an incentive
to take a loss on a short sale rather than see a judge unilaterally
change the terms of a mortgage.

"It was a negotiating ploy more than anything," Liniger said.

"Its disappointing," said Financial Services Committee chairman
Barney Frank (D-Mass.) of the bankstendency to foreclose rather than
agree to a sale. "I’ve heard that and I’ve been trying to press the
banks not to do that."

Without bankruptcy reform, the only power the government has is persuasion.

"In the absence of bankruptcy [legislation], you’re talking about
contracts that we cannot abrogate," he told the Huffington Post.
"Thats why bankruptcy was so important."

Is there any chance Congress will return to it?

"Excuse me, what planet were you on last week? The vote was 45 to
51. Why would you ask that? Do I think theres a likelihood we could
overturn 45-51? No," said Frank.

"I wish it weren’t the case," he added. "Maybe theres some kind of compromise."

Sen. Dick Durbin (D-Ill.) isn’t confident. "The purpose of the
debate last week was to try to create some impetus for the banks to
start renegotiating these mortgages in a positive way and the industry
fought it," Durbin, who last week concluded banks "frankly own the
place," told the Huffington Post. "I think many of the banks have not
operated in good faith when it comes to this mortgage foreclosure
issue."

Homeowners are the big losers of the banksbattle against the bill.
But real estate agents are now losing real money as commissions fall
through, making them a potential lobbying counterweight to the banks.

The National Association of Realtors wants the rules changed: "We
are advocating measures that would help streamline the process when
using FHA, Fannie or Freddie," said NAR spokeswoman Mary Trupo in a
statement to the Huffington Post. "We are hoping that new process and
regulations are put in place."

Fannie Mae just wrapped up a pilot program
to test a process for streamlining short sales by partnering with local
listing providers in Arizona and Florida to pre-approve 400 properties
for short sales. The government-backed mortgage firm is still
evaluating feedback from brokers, but overall the program was a
success, and a new short sale initiative is in the works for this year.

"Short sales are one of the tools to avoid foreclosure if all other
workout options are exhausted. Its always in the best interest of the
homeowner, the community, and the investor to avoid foreclosure," said
Fannie Mae spokeswoman Amy Bonitatibus in a statement to the Huffington
Post.

Liniger says Re/Max recently trained 5,000 employees in short sales.

Lita Smith-Mines, a lawyer who specializes in real estate on Long
Island, told the Huffington Post she and her colleagues often see short
sales turn into foreclosures because the bank won’t play along–even
when losses are as small as $25,000 and the offer is as high as it will
get. And much higher, in this market, than the bank will get from a
foreclosure auction. The legal costs of foreclosure alone typically run
to $50,000.

"Theres no common sense when it comes to lenders. They have their
paperwork and if you don’t slot perfectly in, they just say no," she
said.

"A lot was taken on the front end [during the housing boom], but
they’re not giving anything back on the back end," she said.
Smith-Mines, though, said she isn’t surprised. "If they actually cared
about borrowers, we wouldn’t be in this mess in the first place."