Treasury Announces New Program for Distressed Homeowners Where Loan Modifications Not Possible
The Treasury Department on Thursday announced two new programs to help distressed homeowners avoid foreclosure. The first program will provide incentives for lenders to modify mortgage terms. The second program will streamline the short sale process. (A short sale is a transaction with the lender and the homeowner where the lender agrees to a sale for less than the value of the homeowners’ mortgage.)
Under the program, if a modification is not possible, the new program contains steps to encourage the quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future.
Foreclosure Alternatives, one of the new programs under the administration’s Making Home Affordable effort, will make the short sale process easier for a borrower who is eligible for a Home Affordable Modification but who does not qualify for a modification or cannot maintain payments during the trial period or modification. The other elements of this program are:
- Incentives for servicers to pursue alternatives to foreclosures
- Borrower incentives to cover relocation expenses to homes that are affordable
- Streamlined process combining short sales and deed-in-lieu transactions
Although short sales are often discussed in lending circles as a common and simple transaction, in reality a short sale is a homeowner’s last resort before foreclosure if a loan modification is out of reach. Short sales are very complex transactions involving many diverse people and companies: purchasers, lenders, loan servicers, appraisers, brokers, title agencies, mortgage insurance companies and junior lien holders. A short sale usually is more favorable for borrowers, investors and communities. However, due to the complexity of and time required for completion of these transactions, servicers historically have often opted to pursue foreclosure instead, even where a short sale would have provided a substantially better outcome for borrowers, investors and communities. Short sales are usually less damaging to homeowners’ credit and are less costly both for borrowers and lenders. One study found that loan losses average 19 percent with short sales, compared with 40 percent with foreclosures. But more than seventy five percent of short sale deals are not completed, mostly because lenders are rarely motivated to proceed deliberately after receiving a short sale offer.
The second program, Home Price Decline Protection, contains protection incentives to protect against falling home prices. To encourage the modification of more mortgages and enable more families to keep their homes, the government will provide compensation based on recent home price declines, structured as a simple cash payment on every eligible loan. Home Price Decline Protection (HPDP) incentives are designed to address investor concerns that recent home price declines may persist. Together the incentive payments on all modified homes will help cover the incremental collateral loss on those modifications that do not succeed. HPDP payments will be linked to the rate of recent home price decline in a local housing market, as well as the average cost of a home in that market.
