The US Treasury website announced long-awaited guidance on a plan for mortgage companies to speed "short sales" of homes and other loan modification alternatives which began on Monday in order to hold back a rising tide of foreclosures.The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies completion of short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off the mortgage, even if the price falls short of the amount owed.
Announced in May, these incentives expand on the government's Home Affordable Modification Program, known as HAMP, which so far has been of limited success in lowering payments for at-risk homeowners. Earlier on Monday the Treasury stepped up pressure on mortgage companies to put into place 650,000 trial modifications. Guidelines address barriers that have often hindered short sales by setting limits on the time it takes a bank to approve an offer. This frees borrowers from debt, and can reduce claims of subordinate lenders.
"While HAMP program guidelines are intended to reach many distressed borrowers, servicers are still often unable to approve -- or offer -- a modification," the Treasury said in its announcement.
Short sales are preferable for real estate agents and community groups over foreclosure, because they preserve the borrower's credit rating and leave the property in better condition than an eviction. While it's not unusual for primary lenders to experience steep losses with short sales, recovery is typically far better than in the case of forclosure.
Short sales have been frustrating for borrowers and real estate agents as they often get bogged down with negotiations involving multiple lien holders and mortgage insurance companies. Real estate agents have complained that sales fall through while lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.
Financial incentives for completing short sales, or transactions where the deed is simply transferred to the lender, include a $1,000 payment to servicers and a maximum of $1,000 paid to investors who sign off on payments to subordinate lien holders. In addition, borrowers would receive $1,500 in relocation expenses.
One requirement is that the mortgage company has ten days to approve or disapprove a request for short sale, and this transaction must fully release the borrower from the debt. It also prohibits mortgage companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.
In one of the most contentious issues gumming up negotiations between lenders, the guidance caps the aggregate proceeds to subordinate lien holders at $3,000. In recent months, second lien holders have begun demanding more money from the first lender, seller, buyer or agent in exchange for releasing their claim. According to agents, because primary lenders now face larger losses in a foreclosure, some subordinate lenders have felt empowered.
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