It’s been several weeks since the Obama Administration released guidelines on the financial incentives and uniform process for Short Sales that became a part of its $75 billion Make Home Affordable program in May.  We’re tracking how the program is doing.

 According to a Washington Post report by Renae Merle, “ Plan to Encourage Banks to Allow Short Sales” (May 15, 2009) lenders representing 75 percent of the U.S. mortgage market have signed on to the Make Home Affordable program and over 50,000 home owners have received offers to apply for modifications or refinancing so far. To lessen the Lenders’ risk in modifying loans $10 billion has been set aside to reimburse Lenders for losses should homeowners in modified loans fails to meet their repayment obligations.

 According to the government plan, those who apply for, but do not qualify for, the modification will be offered an opportunity to sell the home, by Short Sale, if necessary.  In order to sweeten the deal the government is contributing $1000 per first loan Lender and up to $1000 per junior position Lender toward the Short Sale settlement.  Homeowners may be given up to $1500 toward moving expenses by the government, an aspect of the program that is similar to “dollars for keys” that some banks have offered to get delinquent homeowners to vacate their properties without doing any damage on their way out the door.

 The loan modification and homeowner “dollars for keys” aspects of the Make Home Affordable program have not been popular with many a blog commenter, particularly among conservatives who feel that it’s not fair that the average homeowner labors hard to pay off the mortgage, even when the amount owed is more than the current value of the property; yet others who have been irresponsible are being rewarded for making bad decisions. 

 The President has admitted that the plan is not fair, but he stands by the necessity of implementing this plan in order to stem the tide of mortgage defaults.  Getting foreclosure under control is critical to turning around the economy.  In his original program announcement in February, Obama said that while only 12 percent of the home mortgages are sub-prime, half the foreclosures thus far come from this category.  Modifying subprime loans should go a long way to relieving the current foreclosure problem.  He also commented that, according to recent studies, for each home that goes into foreclosure in a neighborhood, it lowers the value of neighboring homes by as much as 9 percent.  To save our neighborhoods, we have to cut the problem off at the source.

 When a Short Sale can’t be accomplished, then homeowners who fall through the loan modification program must be offered the opportunity for a Deed in Lieu of Foreclosure before the Lender goes ahead with a foreclosure.

 The Make Home Affordable program will not help everyone.  There are dollar limits.  People with jumbo loans may not be eligible.  There are limits in terms of how much of monthly income is tied up in the mortgage.  If the homeowner is already under 31 percent of gross income spent in mortgage expenses the loan modification program will not apply.  If the homeowner is not able to show hardship, the program will not apply.   Investor properties and second homes that are in foreclosure will not be eligible for the loan modification program.  There will be plenty of ineligible properties for Investors to pursue, but it remains to be seen whether Lenders will be interested in doing Short Sales with these properties when their resources are tied up in working with the Make Home Affordable program.

 Other features of the federal Short Sale program:

• There are new standard forms and rules to follow, including a Short Sale Agreement and Offer Acceptance Letter that all participants must use.
• There are standardized parameters for a BPO or appraisal that the Lender must get from an independent source received no more than 120 days before the Short Sale agreement is reached.
• Homeowners must be given at least 90 days to market and sell the house and up to one year in certain markets.
• The program assures that Real Estate Agents and other professionals included in the settlement will be paid usual and accustomed commissions.  These fees will not be negotiated down by the Lender or other parties in the deal.
• The Borrower may not be charged fees to participate in the transaction.
• The program expires in 2012.

We will continue to monitor closely the results of the Make Home Affordable program, and especially will be looking for the impact of the Short Sale program.  We want to know in particular:

 Whether the Short Sale process is actually streamlined and time frames for their completion are shortened;

• Whether the new forms and process make it easier or more difficult for Investors to participate;
• Whether the percentage of successful Short Sales improves;
• Whether the process makes it easier to predict the Lender’s response, and whether Investors will be able to work within Lender minimum net returns.
• Whether BPOs will accurately reflect actual market value based on new guidelines.

 There are certainly new incentives for Lenders to accept Short Sales now from those who fall through the modification process through Make Home Affordable, and there is a chance that the process will be streamlined.  The jury is out on its overall impact, and its specific impact on Investors.  The guidelines have removed some of the major hurdles Real Estate Agents had with the process, and it should make it easier to team with Agents to get Short Sales completed.  We hope that it succeeds in saving millions of Americans from foreclosure.