Obama Administration Plan to Improve Short Sales

July 23, 2009 by  
Filed under Short Sales Stories

obama110Short Sales Will be Streamlined and Encouraged by the Treasury

On May 14th, 2009, the Making Home Affordable program created by the Obama administration was expanded by the Treasury Department to provide incentives for homeowners and lenders to engage in short sales. The program also encourages deeds in lieu of foreclosure. The Treasury Department unveiled this plan by calling these provisions Foreclosure Alternatives in the Making Home Affordable program.

To begin the process the lender evaluates the sellers to see if they qualify for the program, because the borrowers/sellers must meet the requirements of the Home Affordable Modification program. In other words, the borrowers who want to be sellers must meet the same standards applied to borrowers who are looking for loan modifications under the Making Home Affordable program, but are unable or unwilling to go through with the loan modification. Also, the lender will evaluate the property to see if it is reasonable that a sale will produce enough money to allow the lender to approve the short sale, i.e. will the net proceeds of a sale at the estimated sales price be an amount the lender would accept. A related step that the lender must take at the beginning of the process is to see if the condition of the title makes it plausible that all of the other loans and debts secured by the property will be able to be satisfied by a short sale. If the sale will produce enough money to satisfy the first loan, but not enough to take care of the second, third or fourth liens, then the property is not a good candidate for this program.

Sellers who complete a short sale can receive up to $1,500 when the sale closes. In nearly all short sales, the sellers get nothing out of the sale. With this program, they can use this money to pay some of their moving expenses when they finish the short sale. This helps the recurring problem that sellers need funds to be able to relocate when the home sells. This same $1,500 incentive payment applies to borrowers who give their lender a deed in lieu of foreclosure.

Loans have servicers and investors. The servicer collects the monthly payment and otherwise deals with the administration of the loan. The investor owns the loan and gets the net proceeds of each payment, after the servicer gets paid for its work. The servicer can get up to $1,000 for completing a short sale or accepting a deed in lieu of foreclosure. This is a decent incentive when you consider that the servicer gets a few cents from collecting each monthly payment.

In addition to these incentives, this expansion of the Making Home Affordable program creates a standard process to follow in a short sale. It creates timelines for the performance of the short sale, which is a welcome addition as they frequently drag on and on. The program also creates standard documents for use in short sales and deeds in lieu of foreclosure. The standard documents will include a Short Sale Agreement and an Offer Acceptance Letter. This standardization will make short sales easier to do, and the performance timelines should speed up the process. The Treasury update issued to explain this program says the Short Sale Agreement will “establish clear time frames for performance.” I hope this means there will be clear time limits for a response from the lender to a proposed short sale contract. If so, this could greatly encourage buyers to purchase short sale properties. A quicker decision by the lender will make it easier for the buyer to wait for the short sale to close, as some short sale buyers get frustrated with the process and buy another property.

The lender has to allow the sellers/borrowers a minimum of 90 days and a maximum of a year to sell their property. The time will vary depending on local market conditions. The property to be sold must be listed with a real estate agent that has experience in selling properties in the neighborhood. So, it would be wise for more real estate agents to take short sale training classes.

The seller and the lender will spell out “reasonable and customary real estate commissions and selling costs” in the Short Sale Agreement according to the guidelines for this program. These selling costs and commissions will be paid at closing from the proceeds of the sale. One of the best parts of the entire initiative is that once an offer is received the lender cannot try to negotiate a lower commission to be paid to the real estate agents. In other words, the Short Sale Agreement establishes the rate of the commission and the lender cannot try to cut it during the negotiations on the Offer to Purchase in the short sale. This will encourage more real estate agents to do short sales.

The lender will establish both the property value and the minimum amount that the lender will accept. So, the lender will order an appraisal or a Broker Price Opinion (BPO) and use that to establish a reasonable sales price for the property. By the way, the appraisal or BPO will have to be current, as the program requires that they be done within 120 days of the Short Sale Agreement. This appraised value will be the basis for the lender’s decision of how much they will accept as the short payment of the balance due on the loan. Many lenders will accept 80% to 90% of the value established by the appraisal or BPO, which allows buyers to purchase the property at a favorable price.

This procedure of establishing the acceptable value of an offer will be a wonderful improvement to a short sale, as the seller will get this information at the beginning of the marketing effort. In short, the seller will know what offers will be acceptable to the lender. This should eliminate the “guess again” feature found in some current short sales, where the lender will occasionally turn down an offer without giving a counter offer or any guidance to the seller. The opposite should happen under the current program, i.e. the lender will instruct the seller concerning the price at which the property should be listed and also provide guidance on price reductions.

One of the biggest problems in short sales comes when the property has a first loan and additional junior liens. For example, many homes have a first loan and a home equity line of credit that is a second loan. There is some assistance from this program because the Treasury will contribute money to help pay off second loans and other junior liens. For every two dollars that the lender allows to be paid to the junior lien holder, the Treasury will put in an additional dollar, up to a limit of $1,000 from the Treasury. Since many lenders in first position will only allow a junior lien holder to get $3,000, this program should make it easier to pay off junior liens.

If the borrower is unable to sell the home within the time specified in the Short Sale Agreement, the lender may consider a deed in lieu of foreclosure, in which the borrower voluntarily transfers ownership of the property to the lender. However a deed in lieu of foreclosure only works if there is only one loan on the property because the lender will not want to accept the property burdened by the obligation to pay off the junior loans.

If you want to read all the details, the entire Treasury Update: Foreclosure Alternatives and Home Price Decline Protection Incentives is found at http://tinyurl.com/qlbn9m. or http://www.treas.gov/press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf

This program will be available until 2012. Let?s hope we are done with short sales long before that.

Owner’s Choices: Short Sale versus Loan Modification

March 14, 2009 by  
Filed under Short Sale How To

treasury-building-70Recent legislation encourages loan modification in an effort to decrease the number of foreclosures. If you are meeting with homeowners, see if one of their goals is to keep their home.

The new rules on loan modification provide relief for people who have had financial difficulty, but remained current on their payments. There are also some new programs for those in imminent danger of foreclosure, and those who are already up to 60 days late on their payments.

These programs are only for a family’s principal residence. It does not apply to second homes or investor owned properties. Loans that were originated before January 1, 2009 are eligible for modification.

Loan servicers will follow a series of steps specified in the programs to reduce the homeowners’ monthly payments in order to first bring the amount of the payments down to 38 percent of gross monthly income. As a second step, the government will share in the obligation to lower the payments even further to 31 percent of borrowers’ income. The first step in the process involves reducing the interest rate down to as low as two percent. Next, the term of the loan can be extended to up to 40 years. As a last resort, the principal of the loan can be reduced. The homeowner’s monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner?s association dues and/or condominium fees.

There is a payment to the loan servicer from the government to encourage the completion of this process. Also, if the borrower makes the mortgage payments on time for three years, there is a principal reduction payment by the government to the lender as a reward to the borrower for staying current on the financing.

To qualify, the borrower must still be employed and show the ability to make the payments after the adjustment. The loan can be well over the 80% of the value of the home that is required for refinancing. In fact the loan can be over 100% of the value of the home, so that people who want to keep their homes, even if it is worth less than the amount of the loan, can get their payments in line and stay in their home. The borrower gets only one loan modification, so it better be right the first time, because there will be no second time.

Loan servicers will use a net present value (NPV) test as a standard to judge each loan that is at risk of imminent default or is at least 60 days delinquent. The NPV test compares the net present value of cash flows with and without modification. If the test is positive ? meaning that the net present value of expected cash flow is greater with a modification ? the servicer must modify the loan. If the NPV test returns a negative result, loan modification is optional.

To see the Guidelines issued by the US Treasury, click here. For details on the Making Home Affordable Plan with all of its modification opportunities, click here. For all the details on the Financial Stability Plan that is part of this initiative, click here . Executives from Housing and Urban Development emphasized that access to the loan modification program is free and they warned homeowners to beware of rescue scams that claim to charge a fee for a government modification

For owners who have lost their jobs, this program will not work. If the owner needs to sell the home to move to another area, or if there are other personal issues such as divorce, these programs will not change the choice of pursuing a short sale. But for families who want to refinance out of a bad loan but have been prevented from doing so because the value of the home has fallen or the loan qualification requirements have become too severe, this new program should work well. In the next few weeks the loan servicers should be set up to review applications for loan modification.

For people who want to stay in their homes, this could be a godsend, if they qualify. There is no moving, no tax consequences, no effect on credit scores and no emotional trauma. For those who have to move, the short sale, deed in lieu of foreclosure or foreclosure itself are still the choices.

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