Big loans, short sales

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: which has already lost more than $50 billion in ill-advised real estate-related ventures, are walking a tightrope.

If they do short sales without trying to extract anything from the sellers, everyone in the country who is upside down could try to wriggle out. The banks and bondholders will take a fresh wave of hits; some might not survive. But if a lender drives too hard a bargain, the owner can default, leaving the bank worse off than if it had taken the short sale.

“It’s a game of chicken, with huge consequences for the banks, the borrowers and the economy,” Churchill said.

Lenders’ demands take many forms. Mary Gonzalez, an agent in San Jose, Calif., had to stave off a request from a mortgage company that her client take cash advances on her credit cards to settle a mortgage debt. That lender eventually agreed to settle for a few thousand dollars.

At the other extreme, JPMorgan Chase says it wants short sellers to sign a note for the full balance due, with interest, over 30 years if necessary.

While there are no authoritative national numbers on short sales, a related statistic, the number of people selling their homes for less than they paid, is rising rapidly, at least in California.

In August, 54.2% of Californians who sold their homes suffered a loss, a sharp rise from 16.8% in August 2007. Today’s number exceeds the peak of 53.2 % reached at the end of the last downturn in January 1996, according to the research firm DataQuick. (In some of those cases, the sellers may have lost their down payment without necessarily incurring a cash shortfall at closing.)

The foreclosure option is bad for everyone. Short sales offer all parties the ability to cut their losses earlier. But they also bring homeowner and lender into direct conflict on the contentious issue of who was responsible for those losses in the first place.

Borrowers went wild during the boom, buying multiple properties at high prices, signing outlandish loans, taking out large sums to live in high style. But none of that would have been possible, of course, if banks chasing quick profits had not abandoned their lending standards.

The Kellys, both 64, did not join the free-for-all. He works in financial services; she is a doting grandmother and a volunteer at the local blood bank. “We’re not loaded,” Linda Kelly said.