Second-lien holders may not be happy with proposal's cap on payouts
From chicagotribune.com, By Kenneth R. Harney, December 13, 2009
If you're in trouble on your mortgage and you can't get a loan modification, check out the Obama administration's new standardized short-sale plan that's scheduled to roll out in coming months.
The program, outlined Dec. 1 by the Treasury Department, is an attempt to streamline what has traditionally been a contentious, time-consuming process by requiring lenders and others to use nationally uniform documents, timelines and financial incentives.
A short sale involves a lender or investor agreeing to collect less than the balance owed on a mortgage debt out of the proceeds of a negotiated sale of the property. Often a short sale is the last alternative to foreclosure available to distressed homeowners and banks.
Your best move may be to see if your lender will accept a short sale. Though the idea sounds straightforward, in practice it is not. First, the bank needs to be convinced a short sale will yield it more money at the bottom line than a foreclosure.
This usually means you need to bring in a real estate agent who knows the ropes and can pull together the key information needed by the bank: recent comparables on closed sales, local market trends and the likely selling price of your house.
Plus, you'll need a buyer for the house, one who will pay a price acceptable to the bank and has financing to close the deal. If you happen to have a second mortgage or home-equity credit line on the property, you'll also need to negotiate how much that lender will receive from the sale proceeds.
That can be tricky. In depressed real estate markets, the second-lien lender may be holding a note that's worthless in a foreclosure because plummeting property values have wiped out the collateral. Yet that same bank is in a pivotal position: It has the legal power to block the short sale by refusing to sign on to the deal.
Equally troublesome in short sales is the fact that banks, mortgage servicers and bond investors often have conflicting requirements for documentation and financial yields that can complicate and drag out the haggling for months.
Enter the Obama administration's new streamlining plan. Besides requiring lenders and servicers to use uniform documentation, preapproved short-sale terms and accelerated turnaround times, the plan also provides financial incentives for key players:
--Homeowners who successfully complete a short sale under the program receive $1,500 to defray relocation costs. --Mortgage servicers can receive $1,000 per case.
--Investors get $1,000.
--Second-lien holders receive up to $3,000 from the sale proceeds.
Even real estate agents get something: The rules prohibit banks from forcing them to cut their commissions from the listing agreement as part of the final deal.
Sounds like a formula for encouraging a lot more short sales, right? The jury will be out on that for months, and most major lenders are still studying the fine print of the Obama program. But early reactions from big banks appear to be positive.
Dave Sunlin, a senior vice president for Bank of America, said, "We're very pleased. We welcome any effort to reach standardization for all parties" involved in short sales.
Faith Schwartz, executive director of Hope Now, a Washington, D.C.-based group representing the country's largest banks, mortgage servicers, bond investors and consumer counseling organizations, said the plan should bring "uniformity and standards" to a process usually characterized by "mayhem" among the negotiating parties.
Scott Brinkley, a senior vice president for First American Corp., a firm that provides market data for banks, said "you're going to see a lot of cooperation" by lenders and investors.
But there could be a major pothole: The Obama plan tilts to consumers by requiring second-lien holders to drop all financial claims against short-selling borrowers beyond the $3,000 they take out of the deal.
Travis Hamel Olsen, chief operating officer of Loan Resolution Corp., a Scottsdale, Ariz., consulting firm, said the $3,000 payment won't be enough for many second-mortgage lenders.
Today, they frequently obtain additional short-sale compensation, in cash or through promissory notes, from sellers as the price of their participation.
"I'm concerned that that could limit participation" by second-lien holders, he said.
Doug's Take: This is great news for distressed homeowners and the real estate market in general. Granted this is only good news as long as this is all implemented correctly and works properly. Unlike, some recent government programs/interventions which haven't turned out so well, i have higher hopes for this program. for some reason. Maybe because it's more relevant to me? I'm not sure but i'll stay positive about it and say this is good news. One major "issue" with short sales is the unknown of time line and the varying degrees of difference each deal has. Many buyers don't really want to have to deal with a short sale because they are left in the dark for so long while the bank is making a decision. If there were a set amount of time for each bank it would remove that question mark and worry of approaching a short sale. This would allow more inventory onto the market as well which is greatly needed in Sacramento. Any buyer over the last six months can tell you how crazy the below 300k market is right now. I don't know why it has taken this long to come up with the idea of standardized short sales but if it can be pulled off it would be a great success for real estate. But can it be done? What do you think? I guess time will tell...
clear skies,
_doug
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