Taking it in the shorts is one way to describe the bank's position in a short sale. Short sales are when the property is sold for less than what is owed to the bank. It is almost like a pre-foreclosure as the sellers can no longer afford the house and the bank does not want to take the property back. In many cases the mortgage amount is more than what the property is currently worth because of a shift in the market or because the house condition has deteriorated.
Short sales are perceived as a financial relief by sellers. Caution is advised, however. Questions about tax consequences and impact on the sellers' credit may need to be researched.
Tax consequences are often a surprise if the seller has not been forewarned. Most lenders will issue a 1099 form (like a W-2 for self-employed workers) for the amount of the "forgiven" debt. In other words, if a property in St. Paul was mortgaged for $240,000 and is now determined to be worth $200,000 based on sales in the area around the subject house, the bank might be willing to allow a sale for $200,000. The seller would then receive a 1099 that year for $40,000 on which they would have to pay income taxes.
Part of the process in considering a short sale is to consult with a tax accountant to determine how much tax would be owing on the forgiven debt. It is also suggested to consult with a credit adviser as well. Short sales can be the answer, but it is wise to make an informed choice.