Attorney James Caruolo leads a class on options to the foreclosure process for a group of Realtors at the Rhode Island Association of Realtors, in Warwick.

The Providence Journal / Bill Murphy

For homeowners who are having trouble making their mortgage payments and can’t refinance because of poor credit and/or an “upside-down” mortgage, there are options other than foreclosure.

Short sales and quick sales are alternatives that local real estate agents and lawyers say are being used by owners who want to avoid foreclosure or bankruptcy.

In a short sale, a lender agrees to accept less than what it is owed on a mortgaged property and release its lien to allow a sale. The amount of the mortgage that is unpaid is either completely forgiven by the lender and taken as a loss, or in some cases the outstanding debt is reprocessed as a personal, unsecured loan.

Quick sales can be conducted by owners who have enough equity in their properties to pay off their mortgages in full by selling their properties quickly at a price below market value.

In Rhode Island, lenders are allowed to begin foreclosure proceedings once a payment is 60 days late. Notice requirements include publication in local newspapers for three consecutive weeks and dated 21 days before the sale date.

That gives owners about 110 days from the date they first miss a mortgage payment until they lose their house or condo, according to Warwick real estate lawyer James Caruolo.

And with so many properties going into foreclosure, lenders are not wasting time by delaying proceedings, he said. Caruolo said 1 of every 1,000 mortgages written in Rhode Island last year is in foreclosure, as is 1 out of every 25 subprime loans. “These statistics do not even begin to address the number of loans on the brink of foreclosure,” he said.

“Banks are on their attorneys to ... move right through the process,” he said.

There are drawbacks to short sales for homeowners, despite the benefit of having some debt forgiven. Tax may have to be paid on any loan amount that is forgiven. In addition, the short sale will be reported to credit agencies, and it will depress an individual’s credit score, according to David Rubinger, a spokesman for Equifax Inc., a credit-reporting agency.

For lenders, the short sale can also be a case of making the best of a bad situation, according to Robert Goldman, a real estate lawyer with LaPlante, Sowa Goldman in Providence. Goldman estimated that about 15 percent of his closings this year have involved short sales.

For lenders, a short sale can yield more money than a foreclosure, Goldman said, because property often loses value — usually about 20 percent — once it is taken over by a lender.

In quick sales, owners have to accept a sale price below market value, but since lenders are paid in full, quick sales don’t affect a credit rating.

Missed mortgage payments and foreclosure proceedings, however, are another matter, and seriously depress credit scores, Rubinger said.

Caruolo said that even if foreclosure proceedings have started, a quick sale that is in progress, meaning a signed purchase and sale agreement with a qualified buyer, will often persuade a lender to hold off until the sale is completed. And even if a lender is unresponsive in such a situation, there is a good chance that a judge would halt the foreclosure, he said.

Short sales are negotiations with lenders that can be conducted by owners or their representatives, real estate agents and/or lawyers.

Lenders are wary of people who aim to fraudulently bow out of their debt obligations, and they are more willing to grant short sales to owners who can prove they are experiencing genuine financial hardship, according to Caruolo. Caruolo taught a continuing education class on foreclosure issues last week for the Rhode Island Association of Realtors.

Caruolo said hardship situations include job loss, illness, divorce, medical emergencies, family problems and unexpected major expenses.

He said lenders will also expect a formal appraisal or competitive market analysis to show that a mortgage is truly “upside-down” — that is, that the amount owed on the property is higher than its market value.

Caruolo said lenders also expect a detailed and accurate accounting of all the expenses and costs that will have to be paid at short-sale closings, including any real estate commissions.

He advised agents and brokers to determine how much of a commission the lender will agree to, and to get a commitment on this amount from the lender’s qualified agent in writing, before investing their time in a short-sale transaction.

Often, if unexpected costs, such as an unpaid water bill, for instance, are discovered at the closing, the lender will expect the real estate agent to accept a smaller commission to make up the difference, Caruolo said.

The short sale is a negotiation, not a formal legal process, and it is usually a time-consuming and frustrating experience, according to Louis Marandola, a real estate attorney from Providence.

Lenders often take their time in responding to short-sale proposals, which can be trying for owners stressed by the threat of foreclosure, he said. It involves “a lot of phone calls, a lot of headaches,” he said.

Marandola said the statement “subject to bank approval” on a property listing is often a sign of a short-sale situation.

“It’s not something that any Realtor can do, or any Realtor wants to do,” said Stephen Antoni of Remax Professionals in East Greenwich. He said he handled his first short sale about five or six years ago, and his office has negotiated a handful of them in recent months.

Short sales are “a very intricate operation,” he said. “I don’t recommend that any Realtor that hasn’t done one before attempt to do it in this market” unless he or she “learns how to do it properly,” he said.

The chances of getting a lender to agree to a short sale is better before the formal foreclosure process is started, than after it has begun, lawyers said.

“Deal with this issue now rather than later,” Goldman said.

Homeowners who want help from a U.S. Department of Housing and Urban Development-certified housing counselor can call one of HUD’s toll-free numbers, (800) 569-4287, or TDD (800) 877-8339 to get a referral to a local counseling agency. Rhode Island Housing also has established a toll-free Help Center for homeowners at risk of foreclosure: (401) 457-1234.

cdunn@projo.com