The Treasury Department on Thursday announced two new programs to help distressed homeowners avoid foreclosure. One program will provide incentives for lenders to modify mortgage terms, and the other will streamline the short sale process, in which a lender agrees to a sale for less than the value of the homeowners' mortgage.
"Today we are announcing a new program component to help homeowners obtain modifications in areas suffering from home price declines," said Treasury Secretary Tim Geithner in a statement. "If a modification is not possible, we are also announcing steps to encourage the quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future. These are critical steps in stemming the foreclosure crisis and stabilizing the housing market, both of which are critical to our economic recovery."
Foreclosure Alternatives, one of the new programs under the administration's Making Home Affordable effort, will make the short sale process easier for a borrower who is eligible for a Home Affordable Modification but who "does not qualify for a modification or cannot maintain payments during the trial period or modification," according to the Treasury.
A short sale is a homeowner's last resort before foreclosure if a loan modification is out of reach. Short sales are less damaging to homeowners' credit and are less costly both for borrowers and lenders -- one study found that loan losses average 19 percent with short sales, compared with 40 percent with foreclosures. But more than three-quarters of short sale deals fall apart, mostly because lenders drag their feet after receiving offers. And as those properties languish vacant on the market, they drag down property values for entire neighborhoods.
The real estate industry hailed the Treasury's announcement.
If a short sale doesn't go through, the next step for an eligible borrower is to hand over the keys to the bank in a process known as deed-in-lieu.
Under the new program, mortgage servicers "may receive incentive compensation of up to$1,000 for successful completion of a short sale or DIL," and "[b]orrowers may receive incentive compensation of up to $1,500 to assist with relocation expenses."
Another part of Foreclosure Alternatives will encourage holders of second mortgages to agree to short sales by offering "$1 for every $2 paid by the investors, up to a total contribution
of $1,000" from the government.
The other program announced Thursday, Home Price Decline Protection Incentives, is designed to "address investor concerns that recent home price declines may persist," according to the Treasury. "Together the incentive payments on all modified homes will help cover the incremental collateral loss on those modifications that do not succeed. HPDP payments will be linked to the rate of recent home price decline in a local housing market, as well as the average cost of a home in that market."
The new programs will provide needed boost for Making Home Affordable, which so far has only helped 55,000 modify their loans, the New York Times reported on Thursday. There were 342,000 foreclosure filings in the last month alone.