Short sales - good or bad

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What is a "short sale"?

From Wikipedia comes this simple explanation: "A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties. However, in California legislation was passed to preclude deficiencies after a short sale is approved. The same is true of lenders on first loans and lenders on second loans - once the short sale is approved, no deficiencies are permitted after the short sale. (SB 931, SB 458 - Calif. Code of Civil Procedure §580e).

"A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. Both often result in a negative credit report against the property owner."

What happens if the short sale is a rather friendly transaction because of a close family or other relationship between the borrower and the lender? Could a deal sort of slide under the table and result in privileges to one borrower that another might not (or most likely would not) get?

Note that the creditor doesn't necessarily get off the hook for the balance owed to the lender.

Let's sale the house was bought for $175,000, with a $150,000 mortgage. Now it's offered at $125,000. Assuming a full-price sale, where does the other $25,000 that's owed come from?

Does the mortgage holder (bank?) garnish wages of the homeowner who is selling? How is the bank protected? Can it require that the homeowner make the bank the beneficiary of the first $25,000 of life insurance proceeds, in the event of the homeowner's premature death?

Assuming the homeowner still has the job he had when he bought the house, why can't he afford to continue the mortgage payments? Was it a "good" loan when it was made?