When Eric Peterson buys foreclosed homes through courthouse trustee sales these days, the majority of borrowers are still living in the home rent-free, waiting to be evicted.

That is a dramatic change from last year, when most properties were vacant by the time of a foreclosure sale.

"Borrowers are savvy now and they know that once they lose the house, they can milk the system for time and cash," said Peterson, a managing director at the Sacramento private-equity firm Praxis Capital Inc., a large buyer at trustee sales in seven Northern California counties.

"A year ago, nobody knew what 'cash for keys' was," said Peterson, referring to the payments of $1,500 to $3,000 that a borrower typically receives from a servicer to move out.

"It's like all the defaulted borrowers held a secret meeting and now they all know," he said.

With the housing downturn stretching into its fourth year, defaulted borrowers are staying in their homes much longer, further dragging out the process even as the government pushes alternatives to foreclosure.

Many of these borrowers are not embracing short sales as the much-vaunted "graceful exit" from the home that government and industry officials hoped for.

Experts say borrower inertia will mean higher losses down the road. Though a lender accepts a discounted payoff in a short sale, since the borrower sells the home for less than the amount owed on the mortgage, the loss can be 20% less than a foreclosure.

Data from Equator LLC shows that borrowers with high-end properties are now more likely to agree to a short sale than those with low-end properties — a reverse of the situation last year. For example, in Texas, the average unpaid principal balance for a mortgage satisfied through a short sale has increased 7% this year to $153,000, while the average balance for seized homes has declined 10% to $97,000.

"I think everybody overestimated the borrower's desire to do a short sale versus living for free until a foreclosure date," said Christopher Saitta, the chief executive of Equator, a Los Angeles company that has created technology for servicers to process short sales through the government's Home Affordable Foreclosure Alternatives program.

There are only a handful of plausible explanations for why higher-value properties are going the short-sale route. Either low-end borrowers have their "heads in the sand," Saitta said, because they are less sophisticated, or they are staying in the home as long as possible without paying rent until they get evicted.

Borrowers with higher-priced homes also are more likely to care about the damage to their credit.

"The lower-value properties seem to be more resistant to a short sale, so they can stay in the home as long as they can," Saitta said.

Borrowers, like banks, are determining which process is most beneficial to them.

"To say they're not savvy is a misnomer. They know exactly what they're doing," said Travis Hamel Olsen, the chief operating officer at Loan Resolution Corp., a Scottsdale, Ariz., manager of properties headed for foreclosure. "They are looking at the free rent."

So far, only 4.2% of borrowers who were rejected for the Home Affordable Modification Program through July ended up paying off their mortgages in a short sale or deed-in-lieu under the companion Hafa program. Another 12.1% of Hamp dropouts had a foreclosure initiated in July but not completed. But 30.1% had no action taken by the servicer after a loan modification was canceled.

Since Hamp's inception a year ago, 616,839 trial modifications and 12,912 permanent modifications have been canceled, according to the Treasury Department, and theoretically a large number of these borrowers could end up leaving their homes through a short sale.

It will take more time for servicers to move thousands of borrowers through the system, said Olsen, whose company has 10,000 short sales with viable offers this month, double the figure a year ago.

"It's just starting to get to the point of closing deals," he said. "We're ahead of the curve, so the number will pick up in the next three months."

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