Original posted in the Washington Post by Kenneth Harney:
If you're in trouble on your mortgage and can't get a loan modification, check out the Obama administration's new standardized short-sale plan that's scheduled to roll out during the next several months.
The program, outlined Dec. 1 by the Treasury Department, is an attempt to streamline what has traditionally been a contentious, time-consuming process by requiring lenders and others to use nationally uniform documents, timelines and financial incentives.
A short sale involves a lender or investor agreeing to collect less than the balance owed on a mortgage debt out of the proceeds of a negotiated sale of the property. Often, a short sale is the last alternative to foreclosure available to distressed homeowners and banks. Say you've lost your job and fallen behind on your mortgage payments. With little or no income, you can't qualify for a modification program.
In this situation -- grim as it is -- your best move may be to see if your lender will accept a short sale. Though the idea sounds straightforward, in practice it is not. First, the bank needs to be convinced that a short sale will yield it more money at the bottom line than a foreclosure.
This usually means you need to bring in a real estate agent who knows the ropes and can pull together the key information needed by the bank: recent comparables on closed sales, local market trends and the likely selling price of your house.
Plus, you'll need to have a buyer -- one who will pay a price acceptable to the bank and who has financing to close the deal. If you happen to have a second mortgage or home-equity credit line, you will also need to negotiate how much that lender will receive from the sale proceeds.
That can be tricky. In depressed real estate markets, the second lien may be worthless in a foreclosure because plummeting property values have wiped out the collateral. Yet that same bank is in a pivotal position: It has the legal power to block the short sale by refusing to sign on to the deal.
Equally troublesome in short sales is the fact that banks, mortgage servicers and bond investors often have conflicting requirements for documentation and financial yields that can complicate and drag out the haggling for months.
Enter the Obama administration's new streamlining plan. Besides requiring lenders and servicers to use uniform documentation, preapproved short-sale terms and accelerated turnaround times, the plan also provides financial incentives for key players:
-- Homeowners who successfully complete a short sale under the program receive $1,500 to defray relocation costs.
-- Mortgage servicers can receive $1,000 per case.
-- Investors get $1,000.
-- Second-lien holders receive up to $3,000 from the sale proceeds.
Even real estate agents get something. The rules prohibit banks from forcing them to cut their commissions from the listing agreement as part of the final deal.
Sounds like a formula for encouraging a lot more short sales, right? The jury will be out on that for months, and most major lenders are still studying the fine print of the program. But early reactions from big banks appear to be positive.
Dave Sunlin, a senior vice president for Bank of America, said: "We're very pleased. We welcome any effort to reach standardization for all parties" involved in short sales.
Faith Schwartz, executive director of Hope Now, a Washington-based group representing the country's largest banks, mortgage servicers, bond investors and consumer counseling organizations, said the plan should bring "uniformity and standards" to a process usually characterized by "mayhem" among the negotiating parties.
Scott Brinkley, a senior vice president for First American, a firm that provides market data for banks, said, "You're going to see a lot of cooperation" by lenders and investors.
But there could be a major pothole: The Obama plan tilts to consumers by requiring second-lien holders to drop all financial claims against short-selling borrowers beyond the $3,000 they take out of the deal.
Travis Hamel Olsen, chief operating officer of Loan Resolution, a Scottsdale, Ariz., consulting firm, says the $3,000 payment won't be enough for many second-mortgage lenders. Today, they frequently obtain additional short-sale compensation from sellers as the price of their participation -- in cash or through promissory notes -- far beyond $3,000.
"I'm concerned that that could limit participation" by second-lien holders, Olsen said.
The bottom line for homeowners who might benefit: Don't have wild expectations, but definitely ask your servicer whether it plans to participate and whether the forthcoming standardized plan for short sales just might work for you.