As detailed by The New York Times today, starting on April 5th the Department of the Treasury will support short sales and deeds-in-lieu-of-foreclosure as options for homeowners who owe their lenders more than the sale price of the property.
Under the new Home Affordable Foreclosure Alternatives (HAFA) program, which includes all lenders already participating in the Home Affordable Mortgage Program (HAMP), each lender on a property going into a short sale or deed-in-lieu is eligible to receive $1,000 from the U.S. Treasury. The borrower gets $1,500 for relocation costs. (To make sure homeowners don't get railroaded into losing their homes when they should be able to hold on to them, the federal program's rules require lenders to first deem the borrower ineligible for a mortgage modification, or the borrower must try and fail to make a modification work.) The sweetest part of the deal is that the lender can't then pursue the borrower in court for any additional money owed. You send keys, and receive cash.
Why would a lender agree to that? Over at Aol DailyFinance earlier today, Peter Cohan was skeptical that $1,000 will be enough to persuade lenders to cut money-losing deals with borrowers. The Times story echoes that concern, quoting industry insiders who predict that banks will want to hold out for a recovery in sales prices.
But Cohan may have missed the main point of the new federal program. It costs tens of thousands of dollars in legal fees and property maintenance and real estate broker services to take a property all the way through foreclosure and to a final sale. Lenders know this, and know that just taking the property back now, or better yet selling it to an interested buyer right away, could leave them with far smaller losses than if they just wait for the worst to happen. The new federal program doesn't require lenders to go through this calculation, but its guidelines make clear that it expects lenders will do it anyway – after all, it has a responsibility to investors in mortgage-backed securities to maximize financial gains or minimize losses, and could get sued if it doesn't.
Really, lenders will make their decisions based on local market conditions. In areas where homeowners are getting legitimate short sale offers – legitimate being the key concept here, since short sales offer a golden opportunity for crooks to rip off banks in order to score a property cheaply – they have a ready-made pool of buyers who can help them get rid of very expensive headaches.
And the biggest breakthrough here is that for the first time, someone in charge is setting up standardized rules for short sales. Until now, many short sales have been chaotic affairs that string borrowers and buyers along for months, only to have the lender turn down an offer at the last minute because of some alleged objection by a mortgage-backed securities investor. "Alleged," because the lender never had to prove any of this.
Now, under HAFA, lenders will have to set up clear and consistent written policies for determining which short sale offers they'll accept, set a timeframe for completing each sale, and document all of their efforts with each individual borrower. They'll have to set reasonable limits on fees charged to mortgage securities investors. Buyers can't turn around and flip houses to new buyers, which should help avoid much fraud. And both the lender and borrower have to sign an agreement outlining their responsibilities.
Sounds like an improvement to me.