RISMEDIA, March 12, 2010—(MCT)—With the highly touted federal mortgage-modification program falling short of its target numbers, the government has looked into alternatives to foreclosure and come up with a possible, though not original, solution: the short sale, a transaction in which the lender accepts less than the balance owed on the mortgage.
Beginning April 5, 2010, under new Treasury Department rules, short sales will be presented as the potential next step for homeowners who are rejected by or fail to make the grade for the federal Home Affordable Modification Program (HAMP).
RealtyTrac chief economist Rick Sharga suggested that offering the short sale program is the administration’s acknowledgment that its current mortgage-modification effort “can’t solve the foreclosure problem by itself.”
Kevin Gillen, vice president of Econsult of Philadelphia, said there was both statistical and anecdotal evidence that lenders have been holding off on foreclosure proceedings. “No doubt that part of this is due to staff shortages relative to the volume of delinquencies, but it’s also due to uncertainty over near-term government policy,” he said.
Sharga sees positive elements in the new guidelines: Both homeowners and mortgage servicers will have financial incentive to participate in short sales; there are limited payouts for second lienholders and paperwork is standardized, which makes it easier for everyone to comply.
The new Home Affordable Foreclosure Alternative program will run until Dec. 31, 2012. Among its provisions:
-The lender must offer a short sale in writing to the borrower within 30 days after the borrower either is ruled ineligible for mortgage modification under the HAMP program or has been ruled unable to sustain payments under a trial plan.
-A borrower may receive up to $1,500 to assist with relocation expenses.
-Incentives of $1,000 will be offered to lenders for each completed short sale. For each deed in lieu of foreclosure, in which the borrower voluntarily transfers the property to the lender, $1,000 will be paid to the lender.
-A lender with a second lien on the property will get up to $3,000 of the short sale proceeds, or can pursue a short sale outside the program if it doesn’t agree to share.
-The lender will not be permitted to reduce the real estate agent’s commission after an offer on a property has been received.
Currently, short sales don’t make up a big piece of the real estate market, either regionally or nationwide, for a variety of reasons. One is they tend to be difficult and time-consuming. “I handled a short sale of a condo in Bensalem PA that took a year,” said real estate broker Christopher J. Artur. Typically, there is “so much aggravation and red tape involved that some buyers get so fed up they walk away.”
Nationally, just 14% of all existing-home transactions in January 2010 were short sales, the National Association of Realtors says. In the Philadelphia region, they made up 6.9% of total homes for sale at the end of January, said Art Herling, regional vice president at Long & Foster Real Estate.
“I call short sales ‘organized chaos,'” said Noelle Barbone, office manager of Weichert Realtors’ Media office. Each lender works short sales differently, “at their own pace, and it depends on how behind the homeowners are on mortgage payments, if the house is worth less than they owe and whether or not foreclosure paperwork has been filed.”
The new program is unlikely to make short sales easier, even as an alternative to foreclosure. “What one needs in a short sale is time,” Barbone said. But these days, as buyers race to meet the April 30 agreement-of-sale deadline for the federal tax credit, time is money. “I had first-time buyers recently with 20% down, and we found two houses they liked,” said Cheryl Miller of Long & Foster’s Blue Bell office. Both were short sales, however, and neither the seller nor the agent could give a definite timeline for even seeing an executed agreement of sale, she said. “Timing is pretty critical for the first-time buyer and viable houses that are short sales are remaining unsold” as a result, Miller said.
Sharga doesn’t think the new short sale program will be the answer the government seeks. “While we’ll likely see an increase in the number of short sales, I doubt that the reality will live up to the hype.”
(c) 2010, The Philadelphia Inquirer.
Distributed by McClatchy-Tribune Information Services.