The Nation's Housing

Short-sale help is on the way, thanks to Obama plan

By Kenneth R. Harney
Saturday, December 12, 2009

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.

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