Program Will Pay Homeowners to Sell at a Loss

[0334231]

Obama Administration Will Test Program To Let Homeowners Sell For Less Than They Owe....


In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.
This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.
More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.
For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.
Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.
“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser.
The problem is highlighted by a routine case in Phoenix. Chris Paul, a real estate agent, has a house he is trying to sell on behalf of its owner, who owes $150,000. Mr. Paul has an offer for $48,000, but the bank holding the mortgage says it wants at least $90,000. The frustrated owner is now contemplating foreclosure.
To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash around.
Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”
Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.
For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.
For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.
If short sales are about to have their moment, it has been a long time coming. At the beginning of the foreclosure crisis, lenders shunned short sales. They were not equipped to deal with the labor-intensive process and were suspicious of it.
The lenders’ thinking, said the economist Thomas Lawler, went like this: “I lend someone $200,000 to buy a house. Then he says, ‘Look, I have someone willing to pay $150,000 for it; otherwise I think I’m going to default.’ Do I really believe the borrower can’t pay it back? And is $150,000 a reasonable offer for the property?”
Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.
Last year, short sales started to increase, although they remain relatively uncommon. Fannie Mae said preforeclosure deals on loans in its portfolio more than tripled in 2009, to 36,968. But real estate agents say many lenders still seem to disapprove of short sales.
Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.
Mr. Paul, the Phoenix agent, was skeptical. “In a perfect world, this would work,” he said. “But because estimates of value are inherently subjective, it won’t. The banks don’t want to sell at a discount.”
There are myriad other potential conflicts over short sales that may not be solved by the program, which was announced on Nov. 30 but whose details are still being fine-tuned. Many would-be short sellers have second and even third mortgages on their houses. Banks that own these loans are in a position to block any sale unless they get a piece of the deal.
“You have one loan, it’s no sweat to get a short sale,” said Howard Chase, a Miami Beach agent who says he does around 20 short sales a month. “But the second mortgage often is the obstacle.”
Major lenders seem to be taking a cautious approach to the new initiative. In many cases, big banks do not actually own the mortgages; they simply administer them and collect payments. J. K. Huey, a Wells Fargo vice president, said a short sale, like a loan modification, would have to meet the requirements of the investor who owns the loan.
“This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.”
But even if lenders want to treat short sales as a last resort for desperate borrowers, in reality the standards seem to be looser.
Sree Reddy, a lawyer and commercial real estate investor who lives in Miami Beach, bought a one-bedroom condominium in 2005, spent about $30,000 on improvements and ended up owing $540,000. Three years later, the value had fallen by 40 percent.
Mr. Reddy wanted to get out from under his crushing monthly payments. He lost a lot of money in the crash but was not in default. Nevertheless, his bank let him sell the place for $360,000 last summer.
“A short sale provides peace of mind,” said Mr. Reddy, 32. “If you’re in foreclosure, you don’t know when they’re ultimately going to take the place away from you.”
Mr. Reddy still lives in the apartment complex where he bought that condo, but is now a renter paying about half of his old mortgage payment. Another benefit, he said: “The place I’m in now is nicer and a little bigger.”

[0334231]

Based upon this article, I still say this administration (just) don't get it, I think most folks don't want to sell, they want a complete modification package....short sale should be the last stage, but let's first get the banks to modify the loans...

[darlyj]

Personally I doubt that this will do any more good than HAMP has so far at reaching a permanent solution, although it seems like it would be a good idea. If the banks are balking at it, do you really think that anyone in DC is going to risk losing campaign money in an election year? Hopefully DC will prove me wrong and actually give these upcoming ideas and directives something remotely resembling teeth.

That Wells VP really pissed me off. Do you think that she would use up all of HER savings to pay for a home that is massively underwater, on a loan serviced by one of these large banking institutions that cannot find its own backside with two hands and a compass?!? Of course not....but for her it would be a business decision. For the rest of us, well, we're just a pack of lying slackers who don't want to work for anything are just looking for a handout, and God forbid we should want to have a little cushion in the case that we get screwed over by the bank and NEED to move!

Sorry guys - we've all been witness to so many people getting screwed on these boards that her attitude just really hit a nerve.

[gz9gjg]

I believe the program being referred to is HAFA, which is an extension of HAMP.

See this link:
https://www.hmpadmin.com/portal/docs...date113009.pdf

It's supposed to go in effect April 5, an pay $1500 moving expenses to homeowner for clean prompt move-out.

Good luck . . .

[0334231]

I agree with you regarding banks owning DC, but they should be working on a plan to speed up or improvise the current modification plan fiasco. Most people want to stay in their homes and not do a short sale......I believe the short sale will benefit the banks more than the homeowners...I wager the banks will have some type of subsidy from tax payers so they want take a lost....The government can take the same subsidies and use it to keep people in their homes...this is to easy, so I would think the banks will continue to keep the upper hand and continue to deny modifications and focus on short sales, instead of modifications...IF I AM MISSING SOMETHING HERE CAN SOMEONE PLEASE TELL ME....

[Garry]

I agree with you regarding banks owning DC, but they should be working on a plan to speed up or improvise the current modification plan fiasco. Most people want to stay in their homes and not do a short sale......I believe the short sale will benefit the banks more than the homeowners...I wager the banks will have some type of subsidy from tax payers so they want take a lost....The government can take the same subsidies and use it to keep people in their homes...this is to easy, so I would think the banks will continue to keep the upper hand and continue to deny modifications and focus on short sales, instead of modifications...IF I AM MISSING SOMETHING HERE CAN SOMEONE PLEASE TELL ME....

You're missing something. This is only one part of what they're working on. This is just for the people that want to walk, incentive to help them do it the right way. I think it's a good idea.

[Garry]

One more thing. This comment "For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year." Is a biased opinion of the writer. Be careful how you read the article, it's intent could be to form an opinion for you.

[0334231]

You're missing something. This is only one part of what they're working on. This is just for the people that want to walk, incentive to help them do it the right way. I think it's a good idea.

Thanks Gary, from a different perspective....

[Garry]

Do you understand what I'm saying about the comment? This part "the last thing it wants in an election year" was intended to throw your interpretation off, that's exactly what it did.

[nal67]

I don't think this will make any difference in most people's cases. It sounds like it is voluntary and the incentives are so minimal that who cares. We would like to do a short sale but doubtful this will help us as we have an investor who would rather force us into BK than settle with us for 30% of the balance ($300K over their BPO). Stupid. Yet it is the lenders that get bailed out despite their stupidity and greed, not the homeowners.

[Daisy Cutter]

I believe the issue is that the lenders get to collect their CDS insurance in the case of a default, which they don't get to do if they negotiate a short sale. HAMP/HARP/HAFA does nothing to address this conundrum. If we really wanted to clean this mess up, which is very damaging to american consumers and akin to the kind of abuse you see in a 3rd world country- they needed to let AIG go under and squelch those CDS instruments of destruction, or regulate CDSs as actual insurance that must be collateralized. Are they doing either of those, nope.

[kjenkins7]

I believe the issue is that the lenders get to collect their CDS insurance in the case of a default, which they don't get to do if they negotiate a short sale. HAMP/HARP/HAFA does nothing to address this conundrum. If we really wanted to clean this mess up, which is very damaging to american consumers and akin to the kind of abuse you see in a 3rd world country- they needed to let AIG go under and squelch those CDS instruments of destruction, or regulate CDSs as actual insurance that must be collateralized. Are they doing either of those, nope.

Daisey Cutter,

Yep we tend to agree on everything. I agree they need to dump AIG and stop trying to save the sinking ship. Get rid of of those CDS which is the 1# cause of this housing bust.
This concept will help for the "walkers" but other than that i dont get it.
Our goal is to stay in our homes. This concept again benefits the banks and squashes the homeowners. When will they get that WE NEED THE ASSISTANCE NOW and streamline these mods much faster or work on a short re-fi option for principle reductions. My god this isnt hard to figure out...

[pookey]

That Wells VP really pissed me off. Do you think that she would use up all of HER savings to pay for a home that is massively underwater, on a loan serviced by one of these large banking institutions that cannot find its own backside with two hands and a compass?!? Of course not....but for her it would be a business decision. For the rest of us, well, we're just a pack of lying slackers who don't want to work for anything are just looking for a handout, and God forbid we should want to have a little cushion in the case that we get screwed over by the bank and NEED to move!

Sorry guys - we've all been witness to so many people getting screwed on these boards that her attitude just really hit a nerve.

She, and many other people who talk as though the vast majority of homeowners are trying to "pull one over" on the system, would be the first to say this situation is not fair if it happened to them.

It reminds me of a year or so ago when locals here got all fired up because of "all the cars that drive over the speed limit" on one of our main roads. They were adamant that our local cops get out there and stop those "people that were breaking the law." So they did just that, and in the local paper it was noted that many of the people who had been most upset at the meeting were ones that got pulled over for speeding!

Sure there are people that will take advantage of any situation for their own gain - but just as the vast majority of us stop at red lights even at 2 a.m., the vast majority of people always play by the rules. And if they didn't we'd be living in chaos.

If these banks would stop treating people as though they are out to beat the system then we'd see a turnaround in this disastrous situation. Would a few get through that shouldn't have? Of course, but the vast majority would get a fair resolution and our country could start the process of economic recovery.

[crisw]

I am hoping that one provision, in particular, will make a HUGE difference to many of us considering a short sale but who have uncooperative lenders- "the lender’s assurance that they will not later be sued for an unpaid mortgage balance."

[cahomeowner]

I like the idea behind HAFA.....my question is the banks are so overwhelmed responding to loan mod and short sale requests....what makes the govt think these banks are going to be able to provide a response in 10 days when they are taking an average of 6 months to 12 months now?

like most program coming from the bush or obama administration, these are all voluntary programs.....which is why the results have been dismal at best