Government efforts so far have focused on mortgage relief that helps borrowers avoid foreclosure. But the latest push reflects a growing realization that many troubled homeowners cannot qualify for help or would rather move on. So officials are focusing attention on efforts to ease borrowers out of their home without the stigma of a foreclosure.
Under the new program, which has been in the works for nearly a year, lenders are paid if they agree to a short sale, which involves selling a home for less than the balance on the mortgage. The lender must forgive the difference, allowing borrowers to walk away from the rest of the debt. This is potentially cheaper and faster for the lender than a foreclosure and keeps distressed properties from lingering on the market for a long period and bringing down values of neighboring homes.
“This program will provide an alternative to homeowners when a modification is not the best option,” said Treasury Department spokeswoman Meg Reilly.
But short sales have traditionally been a long, cumbersome process with lenders who are suspicious of lowball offers dragging out negotiations for months. In some cases, borrowers have second liens on the property and the holders of those liens can block a deal if they don’t like the terms.
John Downer is facing many of those issues. Within two weeks of putting his Orlando townhouse on the market as a short sale in late January, a bidder offered $35,000 for the three-bedroom home, which Downer had listed for $50,000. He paid $170,000 for it in 2005. “I am cautiously optimistic, but who knows how long it will take,” Downer said.
But more than two months later, Downer is still awaiting word on whether his lender will accept the offer. The bank has warned that the process could take six months to a year, he said. And another lender holding his $33,000 second lien has advised that he may still have to pay off that loan if that second bank is not satisfied with the deal’s terms. “That would be a deal breaker for us,” he said.
The administration has not provided a price tag for its new program or estimated how many people officials expect to help. But to encourage lenders to complete more of these deals, officials announced last week they would increase incentives lenders are offered. Firms can now collect $1,500 if they allow a short sale, up from the $1,000 the government initially planned to offer. A bank that holds a borrower’s second lien can receive up to $6,000 for releasing the homeowner from the debt. And to speed up the process, lenders must now agree to a price before the home is put on the market.
There are also more incentives under the program for homeowners, who can receive $3,000 — up from $1,500 before — to help cover relocation expenses. “The barriers to short sales include a healthy dose of psychological burden from the homeowner, and sometimes you need that little extra push to get the homeowners to a place where they are ready to let go of their home,” said Howard Glaser, a housing industry analyst.
Short sales already make up a growing part of the market, according to First American CoreLogic. They were 8 percent of home sales in January, compared with 5 percent in January 2009, according to the research firm. In the Washington region, they grew to about 15 percent of the market in January, compared with 10 percent in January 2009.
I do think it [the new program] will help on the margins, but the scale of the mortgage distress is so large, it overwhelms any public policy option,” said Sam Khater, a senior economist for First American CoreLogic. “They keep chipping away at it, but it’s a tough nut to crack.”