The Treasury Department unveiled sweeping rules this week to help financially troubled homeowners who need to sell but can't get a price high enough to pay off their mortgages. Homeowners will even get $1,500 to help cover their moving costs.
The plan is designed to help homeowners who don't have the income or debt levels to qualify for a loan modification under the Obama administration's $75 billion Making Home Affordable program. The plan establishes timelines, a standard process and documents, and cash incentives for participation.
"There's always efficiency with uniformity," said Vicki Vidal, associate vice president of government affairs at the Mortgage Bankers Association. "It makes it easier for the parties involved to know what to expect."
Short sales, as these deals are known, reduce the damage to the borrowers' credit record and save the lenders the cost of foreclosure. Short sales also help neighboring property values because the sales price is usually higher than what the house would fetch in a foreclosure auction.
About one in 10 home sales this year was a short sale, or an estimated 500,000 sales, according to the National Association of Realtors. In areas like Las Vegas, southern Florida and California, the ratio is far higher.
To qualify under the new guidelines:
_The property must be the homeowner's principal residence.
_The homeowner is delinquent on the mortgage or default looks likely.
_The loan was made before Jan. 1 this year and is less than $729,750
_The borrowers' total monthly mortgage payment exceeds 31 percent of their before-tax income.
The plan is designed to accelerate the necessary agreements between lenders, real estate agents, buyers and sellers. Too often short sales are anything but quick.
Nancy Philbrick, an agent in Manchester, N.H., waited half a year for Bank of America to approve or reject a short sale offer she sent in for her clients back in April. The couple fell behind on their mortgage after a difficult pregnancy saddled them with a stack of medical bills. They're now renting a home nearby and trying to get back on their feet.
Philbrick found out in late October her client's file moved to another party for review. But the offer expired Oct. 15 after two extensions and the buyer backed out of the deal. Philbrick and her sellers are back to square one.
For its part, Bank of America, like other lenders and servicers, has spent millions of dollars to upgrade computer systems and hire another 3,500 workers for its 12 call centers. The bank services 14 million loans, the most in the nation, including the troubled portfolio of Countrywide Financial, which it bought last year.
But the Treasury Department's plan for short sales has some short comings.
Mortgage companies don't have to launch the program until April 5, 2010, which is no relief for homebuyers, sellers and real estate agents mired in deals now. The program is also voluntary for lenders who hold second mortgages, such as home equity loans or piggy-back loans. The Treasury Department has estimated that about half of homeowners in default have more than one loan on their properties.
While those other secondary debt holders can receive up to $3,000 to release their claims on the property, that may not be enough for larger creditors who would rather go after the borrower.
"Three thousand dollars is not much if you have a $200,000 second lien," said Jeff Lischer, managing director of regulatory policy at the National Association of Realtors. "In large measure, the success of the program depends on the willingness of investors to accept a short sale."
Nevertheless, the new guidelines should reduce paperwork by requiring mortgage companies to use the financial and hardship documents submitted by borrowers seeking a loan modification. Mortgage companies will have to approve short sale terms, including the minimum listing price, before the house is put on the market, which should speed up the approval process.
The government also provides strict deadlines and specific documents for the process. Mortgage companies will receive $1,000 to cover administrative costs.