I've reviewed some potential good news on a federal program that has come into effect recently that is designed to make short sales a more desirable and more easily attainable option. Previously the perception has been that short sales are a slow and complicated process with no guarantee of success. There has been some co operation from banks which are starting to adjust to the market and are becoming more proactive in creating systems and solutions for homeowners in distress. Plus the U.S. Treasury has enhanced the guidelines and incentives for banks that are committed to improving the loan modification and short sale processes.
The Home Affordable Foreclosure Alternatives (HAFA) program, announced in November 2009 and fully implemented April 5, is the government's answer to the problem. It's a supplement to the February 2009 Home Affordable Modification Program (HAMP) that outlines a separate set of criteria for short sales or deeds-in-lieu to address the group of homeowners who are facing foreclosure because loan modification hasn't worked out.
HAMP was a well-intentioned, albeit slow, start to helping at-risk borrowers. Unfortunately, the guidelines for modifications leave out many distressed homeowners who are eligible but are not successful in supporting a new loan.
HAFA provides that missing next step for homeowners who are not approved for modifications. Now, they can pursue a short sale in a more timely and orderly manner. Here are some of the ways the HAFA program is already improving the process:
-Standardizes paperwork and timelines
-Requires lender response on an offer within 10 days
-Allows for preapproval on pricing of a short sale
-Eliminates deficiency judgments on first mortgages
-Offers $3,000 in relocation assistance
-Pays servicers $1,500 toward administrative costs
Many homeowners that have seen their home's value drop to a much lower price than they owe on their mortgage (commonly known as being underwater), are looking for ways to simply get out of their mortgage obligation.
It is thought that a short sale would be more advantageous for mortgage lenders than a foreclosure and with various programs available from top lenders to help homeowners short sell and governmental incentives for lenders to accept short sales, underwater homeowners may have more options.
This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration's most aggressive attempts to grapple with a problem that has defied solutions. More than five million households are behind on their mortgages and risk foreclosure. The government's $75 billion mortgage modification plan has helped only a small percentage of these households.
This new program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their homes by short sale, in which the property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.The idea is to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender.
One of the difficulties of short sales is that estimates on a home's value are highly subjective. Plus banks don't want to sell at a discount. Another complicating factor is when there is a second mortgage. There are often disagreements between the first and second lenders on what they are willing to accept and this is usually a deal-breaker. Historically, it has been much simpler and easier to proceed with a short sale if there is only one lender involved but this tends to be the minority of cases.
The idea is to bring the various parties to the table; the homeowner, the lender that services the loan, the investor that owns the loan and the bank that owns the second. The government intends to spread its cash around. Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves, up to $3,000 in "relocation assistance".
Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure. On the positive side for borrowers, there is the likelihood of suffering less damage to credit ratings. Plus as part of the transaction, they will get the lender's assurance that they will not later be sued for an unpaid mortgage balance.
For communities, the plan will mean fewer empty foreclosed homes waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.
It seems that short sales are about to have their moment, which has been a long time coming. At the beginning of the foreclosure crisis, lenders shunned short sales. They were not equipped to deal with the labor-intensive process and were suspicious of it.
Last year, short sales started to increase, although they remain relatively uncommon. Real estate agents say many lenders still seem to disapprove of short sales. Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.
There are myriad other potential conflicts over short sales that may not be solved by this new program, whose details are still being fine-tuned. Many would-be short sellers have second and even third mortgages on their houses. Banks that own these loans are in a position to block any sale unless they get a piece of the deal. Major lenders seem to be taking a cautious approach to the new initiative. In many cases, big banks do not actually own the mortgages; they simply administer them and collect payments. So this can add another dynamic to the picture.
When considering this process, it's important that you get the right advice based on your own particular circumstances. There is never a 'one size fits all' approach or solution if you are finding yourself in 'deep water' financially. I'm here to help and to make sure that you get the right advice.