PHILADELPHIA — With the highly touted federal mortgage-modification program falling short of its target numbers, the government has looked into alternatives to foreclosure and come up with a possible, though not original, solution: The short sale, a transaction in which the lender accepts less than the balance owed on the mortgage.
Beginning April 5, under new Treasury Department rules, short sales will be presented as the potential next step for homeowners who are rejected by or fail to make the grade for the federal Home Affordable Modification Program (HAMP).
RealtyTrac chief economist Rick Sharga suggested that offering the short-sale program is the administration’s acknowledgment that its mortgage-modification effort “can’t solve the foreclosure problem by itself.”
Kevin Gillen, vice president of Econsult of Philadelphia, said there was both statistical and anecdotal evidence that lenders have been holding off on foreclosure proceedings.
“No doubt that part of this is due to staff shortages relative to the volume of delinquencies, but it’s also due to uncertainty over near-term government policy,” he said.
Sharga sees positive elements in the new guidelines: Both homeowners and mortgage servicers will have financial incentive to participate in short sales; there are limited payouts for second lienholders, “and paperwork is standardized, which makes it easier for everyone to comply.”
The new Home Affordable Foreclosure Alternative program will run until Dec. 31, 2012. Among its provisions:
A borrower may receive up to $1,500 to assist with relocation expenses.
Incentives of $1,000 will be offered to lenders for each completed short sale. For each deed in lieu of foreclosure, in which the borrower voluntarily transfers the property to the lender, $1,000 will be paid to the lender.
A lender with a second lien on the property will get up to $3,000 of the short-sale proceeds, or can pursue a short sale outside the program if it doesn’t agree to share.
The lender will not be permitted to reduce the real estate agent’s commission after an offer on a property has been received.
Short sales don’t make up a big piece of the real estate market, either regionally or nationwide, for a variety of reasons.
One is they tend to be difficult and time-consuming.
“I handled a short sale of a condo in Bensalem (Pa.) that took a year,” said real estate broker Christopher Artur. Typically, there is “so much aggravation and red tape involved that some buyers get so fed up they walk away.”
Nationally, just 14 percent of all existing-home transactions in January were short sales, the National Association of Realtors says.
The new program is unlikely to make short sales easier, even as an alternative to foreclosure. “What one needs in a short sale is time,” Barbone said.
But these days, as buyers race to meet the April 30 agreement-of-sale deadline for the federal tax credit, time is money.
“I had first-time buyers this weekend with 20 percent down, and we found two houses they liked,” said Cheryl Miller.
Both were short sales, however, and neither the seller nor the agent could give a definite timeline for even seeing an executed agreement of sale, she said.
“Timing is pretty critical for the first-time buyer, and viable houses that are short sales are remaining unsold” as a result, Miller said.