TAMPA - In February 2006, Kim and John Cataldo bought their dream home in Tampa's swanky Corey Lake Isles neighborhood. They paid $565,000.

But a year later, after their property taxes and homeowners insurance skyrocketed, the couple couldn't afford mortgage payments and put the house on the market. No offer was more than $500,000.

"By that time, real estate prices had fallen," Kim Cataldo said. "We didn't know what to do."

The Cataldos kept making payments, but were running out of money. They kept trying to sell the home, but the offers dropped lower. In November 2007, the lender filed a foreclosure lawsuit against the couple.

Their best offer from a buyer is $350,000. To their astonishment, the Cataldos say their lender is considering accepting it and forgiving the rest of the loan.

Real estate experts say this arrangement, known in the lending industry as a short sale, is becoming more common in the Bay area as the number of foreclosures rises and sales prices decline. Lenders, in an effort to avoid taking the home back, are increasingly accepting less than is owed.

The process can be significantly less expensive than foreclosure for both lenders and homeowners. And legislation approved late last month has sweetened the deal even further for those selling their homestead by lowering their tax burden on the sale.

"For the lender, it's all about the math," said Charles Richardson, who runs mortgage operations at CNBS Financial Group in Tampa. "Some lenders are willing to take a big hit now to get rid of the bigger hit in the future."

Debbie Ferraro of American Guardian Title in Tampa said lenders had been reluctant to accept short sales, but two weeks before Christmas, attitudes changed.

"Short sale business started going crazy," Ferraro said.

The Cataldos' real estate agent, Nick Davis of ReMax Premier Group in Wesley Chapel, isn't surprised. He closed 12 short sales in 2007 and now has 17 short sale listings. He has offers and is negotiating with lenders on six of them, including the offer on the Cataldos' home.

When the real estate market tanked last year and Davis' business dropped, he saw short sales as a way to continue selling homes. Now, he said, short sales make up 40 percent of his company's business.

"In 2007, we were still growing our business by 22 percent," he said. "That's largely due to short sales."

Ron Donalson, a principal with Alday-Donalson Title Agencies of America, also has beefed up business by specializing in short sale business. He travels the state holding how-to workshops for real estate agents. He said he stages the workshops for free, hoping the agents will, in turn, use his company for the title work.

In the past three months, he has held 31 such workshops and closed about 50 such purchases. Thirty more sales are pending.

"I'm trying to market a positive atmosphere," Donalson said. "Buyers can roll back prices to 2003. Basically, you're buying equity on sale."

For homeowners in trouble, a short sale can be a good alternative to foreclosure. It doesn't help them keep the home, but it can keep the black mark of foreclosure off their credit report. It's also a lot less expensive than going through the court system in a foreclosure lawsuit.

On Dec. 20, when President Bush signed the Mortgage Forgiveness Debt Relief Act, it got even cheaper for owners of primary homes. Before the legislation, homeowners who persuaded a lender to accept a short sale had to pay income tax on the loan amount forgiven by the lender. Under the new law, they won't have to pay taxes on the forgiven amount, up to the original mortgage amount on the purchase of the home.

"For homeowners, this is absolutely something they should look into," Richardson said.

But the process isn't always easy. Especially for investors who aren't eligible for the for tax break.

Tony Maltese, a local real estate investor, got in over his head in deals that went bad. He took out $3 million in loans on nine homes. One home has been foreclosed on, despite an offer for a short sale, he said, and another home is likely to be lost in foreclosure soon.

He's now working on two short sale deals, one for a home in Zephyrhills and one for a home in New York.

"I was reluctant to try this," he said. "But I'm trying to keep my credit from getting worse."

Reporter Shannon Behnken can be reached at (813) 259-7804 or sbehnken@tampatrib.com.