The Obama administration will encourage troubled borrowers who don’t qualify for loan modifications or can’t keep up payments on a modified loan to pursue a short sale or deed their property to their lender in order to avoid foreclosure.

While the main thrust of the administration’s Making Home Affordable initiative remains loan modifications and refinancings, the program is being updated to provide incentives for borrowers and loan servicers to engage in short sales and deeds-in-lieu of foreclosure.

Borrowers — who must meet the minimum eligibility requirements for a Home Affordable modification — will receive up to $1,500 to assist with their relocation expenses when they agree to a short sale or deed-in-lieu of foreclosure. Loan servicers will earn up to $1,000 for successfully completing a short sale or deed-in-lieu.

In addition to incentives, the program establishes a standard process, minimum performance timeframes and standard documentation for short sales and deeds-in-lieu.

Loan servicers must allow borrowers at least 90 days and up to a year to market and sell their property, depending on local market conditions. The property must be listed with a licensed Realtor experienced in selling properties in the neighborhood, the Treasury Department said in a fact sheet explaining the new short-sale initiative.

"Reasonable and customary real estate commissions and selling costs" may be deducted from the sales price if they are spelled out in a short-sale agreement, the guidelines said, and loan servicers must agree not to negotiate a lower sales commission once an offer has been received.

It will be up to the loan servicer to establish both property value and the minimum acceptable net return. Loan servicers will instruct borrowers regarding the list price and any permissible price reductions. The price may be determined based on either an appraisal or one or more broker price opinions (BPOs) dated within 120 days of the short-sale agreement.

If the borrower is unable to sell his or her home within the agreed-upon time frame, loan servicers may then consider a deed-in-lieu of foreclosure, in which the borrower voluntarily transfers ownership of the property to the servicer.

A short sale or deed-in-lieu "usually provides a better outcome for borrowers, investors and communities," the Treasury Department said, but loan servicers often pursue foreclosure instead because it’s a faster and easier process. …CONTINUED

Another factor that can complicate a short sale is the presence of a "piggyback" second loan. Under the new initiative, the Treasury will help pay off junior lien holders, providing $1 in matching funds for every $2 paid by investors, up to $1,000.

In announcing the new short-sale and deed-in-lieu initiative, Treasury Secretary Tim Geithner and Housing Secretary Shaun Donovan provided an update on the Making Home Affordable program’s progress to date.

The Obama administration announced the program Feb. 18, saying it hoped to help 7 million to 9 million homeowners refinance or negotiate loan modifications to avoid foreclosure. On March 4, the administration published the program’s guidelines and authorized servicers to begin modifications and refinancings.

Since then, 14 participating loan servicers have extended offers on more than 55,000 trial modifications and mailed out more than 300,000 letters with information about trial modifications to borrowers, the Treasury Department said in a progress report.

To encourage lenders to make more loan modifications in markets where price declines continue, the Treasury Department announced it will make up to $10 billion in "Home Price Decline Protection" incentive payments.

The payments, to be made at the end of the first and second year of successful loan modifications, are intended to offset losses on loan modifications that don’t succeed. The payments will be linked to the rate of recent local home-price declines and the average cost of a home in that market.

Fannie Mae has received more than 233,000 eligible refinance applications through a new automated underwriting system, DU Refi Plus, and more than 51,000 of those had loan-to-value ratios of between 80 percent and 105 percent (the maximum allowed by the program). About 1,500 Home Affordable refinance loans have closed and been delivered to Freddie Mac, with substantially more expected in the next 60 days from Freddie Mac’s largest lenders, Treasury said.


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