Expiring mortgage relief could boost foreclosures (MoneyWatch) Although a growing number of struggling homeowners are managing to sell their homes before they are foreclosed, that positive trend may abruptly end unless the government continues mortgage relief policies that have encouraged these sales. Third-quarter sales of properties in pre-foreclosure, meaning the owner is in default or the home is about to hit the auction block, outnumbered foreclosure sales for the first time since the housing crisis hit, according to a report today by research firm RealtyTrac. Combined with short sales, these pre-foreclosure transactions accounted for 32 percent of total homes sold in the quarter, while bank-owned foreclosures accounted for only 10 percent. "The shift toward the earlier disposition of distressed properties continued in the third quarter as both lenders and at-risk homeowners are realizing that short sales are often a better alternative than foreclosure," said Daren Blomquist, vice president at RealtyTrac, said in a statement. Yet while short sales, in which the lender accepts a lower offer for the home that what is owed on the mortgage, have become one of the most popular and viable ways to sell a distressed property, the trend could be stifled as soon as January. That's because a 2007 law to aid distressed homeowners by giving them a tax break on the amount of principal forgiven in a short sale, the Mortgage Forgiveness Debt Relief Act, is set to expire at the end of the year. "If that law expires as scheduled, homeowners who agree to a short sale could see their income tax jump significantly because the portion of the unpaid loan balance not covered by the short sale proceeds will be considered taxable income in many cases," Blomquist said. That could curtail short sales and tip many homeowners into foreclosure. While foreclosures were down year-over-year by three percent in the third quarter, they were up 21 percent from the previous quarter. Georgia, California and Arizona posted the highest percentage of foreclosure sales. In Georgia, foreclosure sales account for 38 percent of all residential sales in the state. California foreclosure sales decreased 12 percent year-over-year, but foreclosure sales still accounted for 36 percent of all residential sales. Foreclosure-related sales accounted for 34 percent of all residential sales in Arizona, despite a 28 percent year-over-year decrease. Other states where foreclosure-related sales accounted for at least 20 percent of all home sales were Nevada, at 31 percent; Florida, 26 percent; Illinois, 24 percent; Michigan, 24 percent; and Colorado, 20 percent. Beyond short sales, many homeowners are also trying to preserve their credit records and avoid foreclosure by selling their homes before a banks take possession, even if that means selling at a loss. Properties sold in the pre-foreclosure stage sold for an average price of $191,025 in the third quarter, down 3 percent from the previous quarter and 5 percent from the year-ago period. The average sales price of a pre-foreclosure property was 27 percent below that of a non-distressed home. Though that price is well below the price of a non-distressed home, it still fetches more money on average than a home that has already been repossessed by the bank. So-called real estate owned properties, or those owned by a bank, sold for an average price of $161,954 in the third quarter, down seven percent from the second quarter, but up seven percent from the third quarter of 2011, according to RealtyTrac. The average sales price of an REO was 38 percent below the average price of a non-foreclosure home.