A government-incentivized program that acknowledges that not all homeowners are able to afford and keep their homes is intended to expedite the short sale process.
“The push right now is for servicers to avoid foreclosure and the push is coming not only from The Obama administration and the Treasury but also from the owners of the loans such as Fannie Mae and Freddie Mac. And the focus right now is on short sales. So, I think in 2010, you’re going to see a lot more short sales and hopefully reduced foreclosures,” says Travis Hamel Olsen, chief operating officer of Loan Resolution Corporation.
Guidelines issued earlier this month for the $75 billion housing plan include the potential for banks to get government incentive payments in cases where borrowers are allowed to sell their home at a loss, bypassing the foreclosure process.
“Essentially the way the program works is borrowers will have to go through the Home Affordable Modification Program (HAMP) and be denied and then they will be eligible to participate in the short sale plan which is called Home Affordability Foreclosure Assistance (HAFA),” explains Olsen.
Calculators are available at MakingHomeAffordable.gov to help you see how much of a mortgage modification you might qualify for as well as answer some typical questions that homeowners have regarding modifications.
If, however, a modification isn’t possible, Olsen says that’s when this latest government move may play a role.
“If the short sale is completed then the borrower [homeowner] can receive up to $1500 in relocation assistance and the servicers can get up to $1000 compensation,” says Olsen.
“I think it’s a big step in the right direction,” However, he says the success of the program is dependent on the buy-in of the subordinate (second-mortgage) lien holders.
“You have a primary lien holder and they’ll love this program because the servicers will get paid an additional $1000 for completing the short sales. On the other hand, you have all the subordinate lien holders in a short sale who also need to give their approval for the short sale in order for it to happen. The problem, though, is that the subordinate lien holders are the ones that are getting totally wiped out and under the program they would receive $3000 for their lien and in exchange they would have to write off the remaining balance of the loan and give up any rights that they would normally have to pursue the borrower thereafter for the remaining balance,” says Olsen.
Olsen’s company works with mortgage servicers and institutional investors to handle and expedite the short sale process. He says about one in five homeowners is underwater (owing more on their mortgage than their home is worth).
“The traditional timeline out there is anywhere from 60 days to six months to get an approval. Ours is typically around 15 days,” says Olsen.
He says the new guidelines may help troubled homeowners get out from under faster and get their lives back on track.
“With the short sale closed, [homeowners] can move on with their lives a lot faster. From the real estate agents’ point of view, they spend less time doing short sales and then can go about getting other listings and making more money, and from the banks’ point of view, they’re happy because the volume of short sales that they have going on decreases because we’re resolving so many more so much faster,” says Olsen.
In the end, Olsen says, if you need out of your mortgage a short sale far outweighs a foreclosure. “From the homeowners’ point of view, they have reduced credit damage as compared to a foreclosure. On the flip side, for Fannie Mae or any investor of the loan, their losses are reduced. So they want to avoid the foreclosure and the Real Estate Owned (REO) at all costs and so they incentivize homeowners to do the short sale by reducing the credit damage to homeowners’ credit.”
According to the National Association of Realtors, approximately one in 10 homes sales this year was a short sale.