The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed, according to an announcement by the U.S. Treasury.

The U.S. Treasury has set long-awaited guidance on a plan for mortgage companies to expedite the  "short sales" of homes and other loan modification alternatives designed to stem a rising tide of foreclosures.

Barriers that have often sidelined short sales for instance the time it takes a bank to approve an offer, refusing to free borrowers from debt and satisfying claims of subordinate lenders (which recently have been on the rise) will now have guidance from the Treasury Department.

Frustrating for borrowers,  buyers and Real Estate Agents, short sales require that an agreement be reached between the primary lender of a property (that has a market value lower than what is owed against it) as well as any other loans such as a second mortgage or equity loan, often resulting in the lenders taking steep losses on defaulted loans by borrowers who simply cannot keep up with their payments. In tandem with declining market values which left home owners with property which has lost on average 30-40% of its value from the over-inflated market prices back in 2005-2007.

 Real Estate Agents have complained that sales fall through for several reasons. 

1) Buyer tired of waiting for as much as 6 months for an answer to their offer

2) Appraisals do not support what the bank wants to release the lien(s)

3) Secondary Mortgage holders will not accept what is offered to release their liens

4) Borrower accountability:                   

Buyers do not want to be held financially responsible by either signing a Promissory Note for a reduced payoff over a fixed period of time, or tax consequences if the debt is forgiven it was converted to passive income and income taxes were applicable- both carrying severe consequences for home sellers already in distress situations.  Compounding the rush to bankruptcy as a means of debt forgiveness.  

UNDER THE NEW GUIDANCE                                     

Financial incentives for completing short sales or similar deed-in-lieu of foreclosure transactions -- in which the deed is simply transferred to the lender -- include:

1)  $1,000 payment to lenders,

2)  a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said.

3) Borrowers would receive $1,500 in relocation expenses.

The government's Home Affordable Modification Program, known as HAMP,  has previously failed to succeed in lowering payments for many distressed homeowners.  650,000 trial modifications they have started have yet to be completely resolved as a result, The Treasury has stepped up pressure on mortgage companies to make them permanent.

"While HAMP program guidelines are intended to reach a broad range of at-risk borrowers, it is expected that servicers will encounter situations where they are unable to approve" or offer a modification, the Treasury said in its announcement.

BANKS ARE LEARNING WHAT HOME SELLERS HAVE KNOWN ALL ALONG...

It used to be the ultimate trump card when a borrower defaulted was to foreclose.  The Lender would simply take the house back by filing for foreclosure with the courts. As the tide of foreclosures rose to historic new levels, (The Tsunami effect) the banks were beginning to realize their losses were being compounded by the declining Housing Market home values, HOA liens, fines from local zoning ordnances and rising property taxes. In addition homes were abandoned or left in uninhabitable condition (vandalized)

Real Estate Brokers/Agents acting as intermediaries have long said that negotiating a short sale with lenders is one way of reducing credit damages for distressed property owners. A pre-emptive solution to foreclosure.  Now that the market is flooded, lenders are becoming more receptive to settling as opposed to pushing forward with foreclosure.

Typically the hardships included in a Short Sale would be a result of Job Loss, Health Issues, and Divorce, These hardships lead to the borrowers inability to remain current on their mortgage payments. in some cases, in others the financing itself was the culprit. Adjustable rate loans, creative financing, and plundering equity lines of credit during the boom. Today however, the market is very different. Banked Owned, (REO) foreclosed properties are not commanding high resale amounts-leaving the lenders with losses they must account to their investors for.

UNDER THE NEW GUIDANCE REQUIREMENTS

 Mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt.

It also prohibits mortgage servicing companies from reducing real estate commissions on the sale. 

The guidance caps the aggregate proceeds to subordinate lien holders  (second mortgages) at $3,000.

Second lien holders in recent months have begun demanding more money from the first lender, seller, buyer or agent in exchange for releasing their claim, agents have said. Because primary lenders would face larger losses in a foreclosure, some subordinate lenders have felt empowered, the agents said.

  Allison Stewart