When Aloha Airlines shut down a year ago, Ron Verderame knew he had to escape the weight of a hefty year-old mortgage. The pilot faced a slumping real estate market and bleak job prospects, but finally, after trying for seven months to sell his Kane'ohe house, he obtained relief through a short sale.

Such sales — where a home is sold for less than a seller's mortgage and the deficiency is forgiven — are helping dramatically higher numbers of financially struggling homeowners avoid credit-wrecking foreclosure.

The transactions are also providing good deals for buyers, are helping lenders minimize loan losses and are reducing the number of vacant foreclosed homes that can negatively affect neighborhoods.

A short while ago, these deals alternatively known as preforeclosure sales were virtually unheard of in Hawai'i's moderately stable housing market. But not now.

In 2006, there were 13 short sales on O'ahu, followed by a modest rise to 47 the next year, according to an analysis by Coldwell Banker Pacific Properties. Last year, buyers purchased 194 short-sale homes.

Last week, there were close to 500 homes listed for sale on O'ahu as short sales, representing about 9 percent of the inventory, or one out of every 11 homes on the market.

"It just snowballed," said Walt Harvey, an agent with East O'ahu Realty who began representing short sellers last year and more recently has had them represent between 40 percent and 70 percent of his clients. "I think we're going to see more and more of them."

Roughly one-fourth of all short-sale listings are on the 'Ewa Plain, O'ahu's largest housing submarket, though short sales stretch from Ma'ili to Hawai'i Kai. Even a pair of luxury homes listed for $2 million — a Mediterranean-style villa on Kahala Avenue and an oceanfront mansion in Kailua — are short sales.

The rapid growth in short-sale listings means more prospective buyers and their real estate agents are likely to encounter such properties in their search. But despite the potential for a win-win-win for buyers, sellers and lenders, short sales do have drawbacks.

The biggest upside for buyers is getting a home from a seller and lender that, compared with an ordinary seller, are often more motivated to sell at an attractive price, perhaps below market value.

However, it's more time consuming and difficult to negotiate a purchase and complete a sale with lenders in far-away places. Also, significantly more short-sale offers fall through because of the challenges in dealing with lenders, which can be banks, institutional investors and government-sponsored corporations Fannie Mae or Freddie Mac.

Because of the challenges, the number of completed short sales are still relatively small on O'ahu. While short-sale homes on the market last year represented 9 percent of total inventory, the 194 completed short sales represented only 3 percent of homes sold.

STABLE HOUSING MARKET

Nationally, the share of home sales that were short sales last year was about 35 percent in the third quarter and 15 percent in the fourth quarter, according to data the National Association of Realtors began collecting in June.

Part of the reason for fewer short sales in Hawai'i is a local housing market that has been more stable, with far fewer foreclosure starts per household compared with most Mainland metropolitan markets.

But since January, median sale prices of O'ahu single-family homes and condominiums have been down almost 10 percent, after no change last year for condos and a 3 percent dip for single-family homes.

Combined with severe job and wage reductions, the weakening real estate market continues to push more homeowners toward foreclosure.

Verderame had been a pilot at Aloha for nearly five years when the airline abruptly shut down. A year earlier, he and his wife had sold their home in Kalihi and upgraded to a 1970s home with a great view of Kane'ohe Bay for $680,000.

"There was no way we could have made the payments," Verderame said. When he put his house on the market last May, he initially thought it might sell for what he owed, but no offers came in until the asking price was reduced several times.

Then with two offers made in August and forwarded to lender Countrywide Financial, two months passed before the lender looked at the offers, Verderame said, and processing took another month.

"They just dragged their feet," he said. One interested buyer withdrew, but fortunately the other offer was accepted, and the sale closed in December at a $45,000 loss.

Short-sale experts say lenders are swamped by borrowers trying to sell their homes before foreclosure, though many lenders are trying to add staff to better facilitate short sales.

Also, lenders — many of which are fighting for survival and trying harder to reduce bad loan levels — have abandoned the practice of not considering a short sale unless a borrower was at least 60 days in arrears on their mortgage, and now consider short sales for financially strapped borrowers who have yet to miss a payment.

Some lenders even are offering cash incentives to loan servicers for pursuing short sales, while Fannie Mae this year began an experiment preapproving sale prices before receiving offers in Orlando, Fla., and Phoenix. Depending on the results, the practice could be expanded and lead other lenders to follow.

Still, the short sale remains a long and complicated process. It also isn't for all homeowners wanting to get out of a mortgage, and isn't the first priority for lenders trying to avoid foreclosing on a home.

Short sales generally aren't appropriate for investors or owner-occupant homeowners who have other significant assets.

"You actually have to prove hardship," Harvey said.

The recent mortgage relief plan announced by President Obama also could be a better option for some homeowners headed toward foreclosure.

A lender's first priority with a troubled borrower is to modify the loan, which can include extending amortization, lowering the interest rate and partial forbearance.

"Many homeowners think, 'If I can't pay my mortgage, I have to sell my house,' " said Sheri Kagimoto, a mortgage counselor and founder of Mortgage Assistance & Mitigation Group in Waipahu. "Lenders are willing to work with you. There are many options out there."

Kagimoto said lenders review a borrower's tax returns, pay stubs and a written affidavit explaining the financial hardship to help assess whether a borrower is a better candidate for a modified loan or a short sale.

Lenders generally would rather pursue a short sale if there is a significant risk that a borrower will default on a modified loan, she said.

HOW IT WORKS

According to a Freddie Mac report last year, 25 percent of loan modifications fail. In other cases, failure rates are higher.

While losses for lenders are higher for short sales than cured loans, short sales typically result in less of a loss than foreclosure sales, especially when property values are declining.

Clayton Holdings Inc., a Connecticut-based analytics firm servicing the mortgage lending industry, said the average loss on loans nationally for homes sold during the fourth quarter was 37 percent for short sales compared with 56 percent for foreclosure sales.

Usually, short sales are initiated when a borrower lists their home for sale in hopes of selling before foreclosure, or after a borrower contacts their lender to explore ways to avoid foreclosure.

Homeowners and their real estate broker usually set the asking price, but unlike a typical transaction, the lender instead of the homeowner decides whether to accept a short-sale offer.

Getting approval for a sale, despite improvements by lenders, remains a long and arduous process, real estate agents say.

Joanna Spofford, a Coldwell agent specializing in short sales for sellers, said it can take 30 to 90 days to receive a response from a lender on an offer. Mortgage lending giant Countrywide, she said, advises real estate agents submitting offers not to expect a Countrywide negotiator to review the file for at least 30 days.

"It really creates a problem," she said.

Michael Hage, an agent with Kapolei Realty Inc. who has represented buyers and sellers in short sales, said a timeframe of three to six months to achieve a sale isn't uncommon. In one case complicated by a seller's bankruptcy filing, Hage said an offer he sent to the lender in July is still in the review process.

"It's a very uncertain thing," he said. "Short sales are not the approach for the average buyer who's selling their home and wants to get into another one in 45 days."

Besides long waits, another drawback with short sales is that buyers can encounter expenses traditionally paid by sellers, such as a termite inspection. Lenders often can get the seller to pay for various fees such as closing costs, appraisals and inspections, but in some cases may turn to the buyer because of the seller's hardship.

Real estate agents also caution prospective buyers that list prices on advertised short sales aren't necessarily at or below market value.

AGENTS GIVE IN

One major factor complicating many short sales are second mortgages. In a short sale, the first mortgage holder is entitled to recover as much as it is owed before a junior lienholder is paid, which can leave junior lienholders with nothing. But a short sale can't happen without approval of all lienholders. So typically the first mortgage holder agrees to pay the junior lienholder something, though such compromises don't always work.

David Patterson, a local public relations company owner, got caught in the market buying a Hawai'i Kai home with a loan that he later couldn't refinance. He said he had an attractive short sale offer that, to his astonishment, was rejected.

"The bank refused to take it at the last minute ... mainly because of a battle they got in with the second loan holder," he said. "We just had to walk away from it, but in the end the bank might have suffered more."

Some buyers and sellers have been frustrated by the short-sale experience, largely because of their own expectations and confounding actions of lenders.

Real estate agents with short-sale experience said agents who aren't experienced also contribute to client disappointments as well as the relatively high number of short sale offers that fall through.

Working with short sales isn't terribly appealing for real estate agents because the work is more difficult than a normal sale, and can sometimes result in less pay because some lenders try to negotiate agent commissions down.

Spofford said some commissions, which are typically split between the buyer's and seller's agent, have been negotiated from the typical 6 percent to as low as 4 percent. Other lenders implemented policies against asking for reduced commissions as a strategy to encourage short-sale efforts by real estate agents.

Another deterrent for agents is a law passed by the Legislature last year that was intended to protect homeowners from being ripped off by unscrupulous purveyors of mortgage rescue plans. The law, known as Act 137 or the Mortgage Rescue Fraud Prevention Act, has been construed by some as potentially applying to short-sale brokers because the sale effectively stops foreclosure. There are pending efforts to revise the law, though some real estate agents believe they can handle short sales without running afoul of the existing law.

Despite the difficulties, the rising numbers of homeowners exploring short sales have spurred more real estate agents in Hawai'i to represent sellers and buyers on such deals.

"It does give (homeowners facing foreclosure) a sense of hope," said Spofford, who before she became a real estate agent three years ago was a paralegal helping clients defend against foreclosure.

About two months ago, Prudential Locations formed a team of eight agents to focus on short sales. The team is being led by Jon Mann, a Prudential agent and former bank auditor who is the team's liaison with lenders.

"It really came down to helping the client," said Andrew Roth, Prudential's vice president of business development. "It is a situation, unfortunately, that is growing."