The Obama administration wants to standardize, incentivize and popularize the short sale. In an attempt to make short sales more attractive and less confusing to investors, lenders and distressed homeowners, the administration’s plan calls for “standard process flow, minimum performance time frames and standard documentation,” such as a national Short Sale Agreement and an Offer Acceptance Letter. Also included in the plan are monetary incentives:
· $1,000 to lenders;
· $1,500 in ‘key money’ to the homeowner and no loan-to-value (LTV) maximums to abide by;
· $3,000 to second lien holders; and
· a non-negotiable fee for the broker involved, included in the Short Sale Agreement.
Loan servicers are required to obtain either an appraisal or a broker price opinion (BPO) to determine permissible principal reductions. Also, loan servicers must allow owners 90 days to market the property, which must be listed with a licensed broker. The short sale process may run concurrent with foreclosure proceedings. However, no trustee’s sale may take place as long as the homeowner maintains the property in marketable condition. At the servicer’s discretion, the Short Sale Agreement may contain language calling for a deed-in-lieu of foreclosure if the property does not sell in the agreed-to time stipulated by the agreement.
The Obama administration hopes creating one standard set of documents for the entire industry will minimize the complexity of short sales and significantly increase their use as an alternative to foreclosure.
ft take: Adding a short sale remedy to the Making Home Affordable (MHA) Program facilitates a logical leap toward cramdowns. If the lender is willing to sell the property for a lower amount to some other buyer, then why couldn’t they offer the same to the current owner with fewer disruptions? It has been our hope that government will allow bankruptcy judges to don green eye-shades and issue cramdowns from the bench, forcing lenders to compete with the judicial pen.
Since the short sale plan does not place a cap on the owner’s LTV ratio, its addition gives the MHA Program more power to help the distressed California homeowner. Prior to adding short sales to its arsenal, the MHA’s modification abilities were limited and meager and those in need of mortgage assistance in California were vastly under-aided by the initial modification plan. Enacted during the summer of 2009, the government’s foreclosure prevention plan did little for the owner who had overencumbered his home with a loan-to-value (LTV) ratio upwards of 125%—common for Californians who purchased a home during the boom. Investors would do well to take advantage of this program to turn underwater owners into grateful tenants. [For more information on the performance of the federal modification plan, see the August 2009 first tuesday article, Federal loan modification plan lags (and lacks). Look for the January 2010 first tuesday Legislative Watch on SB 306.]
Re: “Update: Foreclosure Alternatives and Home Price Decline Protection Incentives,” from the Department of the Treasury
Re: “New plan could expedite short sales,” from San Francisco Chronicle