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Last Thursday, May 7th 2009, the Obama administration revealed additional programs they are tacking onto the Making Home Affordable program. The main parts of the program aim at preventing foreclosure by helping borrowers refinance, or if they're behind on payments - to seek loan modifications.
The new additions to the program address situations where borrowers find out that they don't qualify for either refinance or modification. The administration will now provide incentives to lenders willing to help homeowners conduct short sales and died-in-lieu to avoid foreclosure.
In a short sale, a property is sold at market value, and the proceeds go to the lender. The difference between the owed balance and the home's sale price is forgiven. But short sales are notoriously tedious transactions that don't always end successfully, and government attention in this area has been long in coming.
Under the new plan, servicers will receive compensation of up to $1,000 per short sale (or deed-in-lieu transfer) accepted. Borrowers in turn could be paid up to $1,500 in relocation expenses. Borrowers will be given 90 days to complete a short sale. But in areas like California, where the market has taken a particularly bad downturn, borrowers will have up to a year to reach a short sale. After that, the property will be transferred to the lender as a deed-in-lieu.
Before being able to participate in the new program, borrowers must first be deemed ineligible for a loan modification. The program is mandatory for all banks that received taxpayer bailout money.
While government assistance in the short-sale arena is certainly welcome, it is unclear just how effective it will be. After all, a $1,000 subsidy is highly unlikely to look enticing to a lender, if the lender believes they can recover $10k or $100k from foreclosing the property and selling it themselves. In fact, in short sale negotiations, many times this is precisely the lender's argument: "We will not accept the terms of the short sale, as we believe the property is worth more, and we can recover more by selling it ourselves." Moreover, investors who have mortgage insurance on properties are more likely to gain more by foreclosing and collecting insurance money.
Only time will tell how much positive effect the new programs will have. The attention the government is turning to the problematic short sale transactions is commendable. And we do hope to see this attention turn into a truly impactful solution.
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