The latest new mortgage program from the Obama administration is aimed at making short sales an easier and more appealing process, for both homeowners and lenders. Often known to be long and cumbersome deals, short sales consist of a struggling homeowner essentially giving up his or her house to the bank lender in order to avoid foreclosure. The bank then sells the property for less than the previous mortgage was worth and generally forgives the rest of the borrowers’ debt.
“It’s very traumatic and embarrassing and frustrating to go through a foreclosure,” said Laurie Maggiano, policy director of the Treasury Department’s homeownership preservation office. On the other hand, in a short sale “your financial issues are your own problem and not neighborhood conversation.”
Short sales can be beneficial for borrowers because they typically cause less damage to their credit scores than foreclosures do. Banks are sometimes better off with short sales because they can often get more money back and they don’t have to go through all the paperwork, evictions, and other hassles of foreclosure.
That said, short sales are notoriously slow in processing and can be very frustrating for potential buyers. The government is now trying to offer enough incentives to speed up the process and save hundreds of thousands of homes from foreclosure.
As originally announced in November, this program was to offer a $1,500 moving cost compensation to homeowners who completed a short sale, but now that amount has been bumped up to $3,000.
Perhaps even more significant, the new program will require lenders to set their minimum price bid before listing short sales on the market. If any offers are received above that minimum, they must be accepted. That should dramatically increase the speed of these sales as lenders usually don’t determine their minimum until they get an offer, which means many offers go unanswered for months while the banks figure it out.
In order to participate in this new program, borrowers must live in the home as their primary residence, and must be delinquent or very close to falling behind on their mortgage payments. And loans backed or owned by Fannie Mae and Freddie Mac are not yet eligible for the program, although they will be soon.
Of course, the question always remains as to whether the government should be helping out individual borrowers, especially when many of them made risky and reckless mortgage decisions during the housing boom.
“We’re not here to make moral judgments about borrowers,” said Maggiano. “We are here to stabilize the mortgage market.”