In a short sale, the borrower sells the home for less than the amount owed on the mortgage and the lender accepts a discounted payoff. They can be far less costly to the lender than foreclosures.
But experts in such transactions say second-lien holders have scuttled many deals by reserving the right to chase after the borrower for the amount of debt not covered by the home sale in states where doing so is allowed.
"Subordinate lienholders are the biggest obstacle to successful short sales," said Travis Hamel Olsen, the chief operating officer at Loan Resolution Corp.
The Home Affordable Foreclosure Alternatives program, which starts next month, will attempt to change that. To give junior mortgage holders an incentive to release their liens and waive any future claims against the borrower, the government will offer up to 3% of what they are owed, subject to a cap of $3,000 per home.
But that carrot may not be enticing enough. According to Olsen — whose Scottsdale, Ariz., company specializes in arranging short sales — second mortgage holders have been asking defaulted homeowners to come up with additional funds to bring the payoff on home equity loans to 6% of the unpaid principal.
Other parties would receive incentives under the Treasury Department's plan.
The servicer of the first mortgage, which acts as a go-between for the many parties involved in a short sale, would get $1,000 for each one that is completed. Borrowers would receive $1,500 to cover moving costs. The program is intended to help borrowers who do not qualify for the Home Affordable Modification Program, or who receive mods but redefaulted.
Since Hamp's inception a year ago, 88,663 trial mods and 1,499 permanent mods have been canceled, according to the Treasury. As of Feb. 28, 168,703 households had permanent loan modifications and 835,194 were in a "trial," so any of these 1 million borrowers who are unable to continue with loan modifications would be eligible for a short sale.
Some experts joke that short sales are a bit like herding cats, because there are several parties that must sign off on a deal. The holders of the first and second liens, the homebuyer, the seller and the mortgage insurer all have the power to kill a deal.
The Treasury program has garnered praise for attempting to streamline this cumbersome process.
"What Treasury did is put in a protocol … so they have a preapproved short sale," said Ron Bergum, the chief executive of Prospect Mortgage LLC in Sherman Oaks, Calif. "What this does is it makes the transaction mainstream, because there's a protocol in place that the government has outlined."
Olsen agreed. He said the program guidelines, which the Treasury released in November, have "done two very important things for the industry, which is attempt to standardize the short-sale process and provide structured time lines."
In other words, HAFA dictates that certain things have to be done in certain amount of time. So, for example, a borrower has 14 calendar days to contact a servicer after they have been notified that they are eligible for a short sale.
Just as the largest servicers created their own in-house loan modification programs for borrowers who did not qualify for the government's loan mod plan, the same is likely to hold true for short sales.
"HAFA will get the process started," Olsen said.
