WASHINGTON — The Treasury Department and the Department of Housing and Urban Development announced further changes to their foreclosure prevention plan Thursday, but instead of focusing on lowering existing payments, the administration pushed for ways to help borrowers exit their home.
The centerpiece of a plan the Treasury announced in February has been a program to reduce borrowers' monthly mortgage payments to 31% of the borrower's income.
But on Thursday, Treasury Secretary Timothy Geithner announced a plan to provide incentives to borrowers and servicers to pursue a short sale or deed in lieu of foreclosure if a borrower is eligible for the modification program but does not qualify under criteria tied to the loan's net present value.
That proposal brought swift criticism from some consumer groups, which said the administration is moving in the wrong direction.
"The government should not be out there encouraging and incentivizing foreclosures," said Bruce Marks, the chief executive officer of the Neighborhood Assistance Corp. of America. "A short sale or deed in lieu is just a faster process to foreclosure."
The plan would give $1,000 to servicers that complete a short sale or deed in lieu and $1,500 to borrowers to help with relocation expenses.
In a short sale, a borrower sells the property at its current value, even if the sale brings less than the total amount owed on the mortgage. For a deed in lieu, a borrower voluntarily transfers ownership of the property to the servicer if the title is free and clear.
The plan provides a streamlined approach to pursuing a short sale, including allowing borrowers 90 days or more to market and sell the property, and steps for appraising the property.
Some observers argued that the administration is doing the right thing, because a short sale or deed in lieu would still be preferable to a foreclosure.
"They are not pushing a short sale over a modification," said Pete Mills, a consultant for Potomac Partners. "They are pushing a short sale where a mod is not possible or where the borrower fails the mod, such as they stop making payments. … It is a better option than a foreclosure from a future credit standpoint."
Terry Moore, managing director of North America banking for Accenture Ltd., said it was unclear if the program would be effective.
"It's an open question as to whether the incentives will be sufficient for lenders to embrace the program. From a consumer perspective, it's positive," Moore said.
One downside could be to make the foreclosure prevention plan even more complicated for servicers. "It definitely adds complexity," Moore said. "This is coming as servicers are overwhelmed not just with modifications, but foreclosures and shorts sales and it's just one more thing that needs the right structure, operations and reporting to make it effective. It adds complexity to the mix in an overworked environment."
The Treasury said that lenders and servicers have offered more than 55,000 modifications to borrowers since the program began, and that 2,150 refinancings have been enacted.
The two departments also announced details on a $10 billion guarantee program that provides incentives for modifications when home prices decline.
That plan calls for offering guarantees of up to 50% if lenders agree to a systematic modification and the borrower completes a trial modification period. The program would provide incentives each month for up to 24 months if the home's price and the average cost of a home in that market both declined.