Homeowners Offered $3,000 to Sell Short

(April 13) -- New streamlined "short sale" provisions may make it easier for many of the millions of homeowners who owe more than their houses are worth to use an alternative to foreclosure.

The Obama administration's Making Home Affordable deal comes with a $3,000 cash incentive that pays homeowners to sell at a loss and gives $1,500 to loan servicers looking to defray costs.

"The short-sale process, which at face value appears to be an attractive option for those looking for deals in this tough market, puts buyers and sellers at the mercy of the bank, making it a slow, frustrating process," said Kurt Gleeson, national vice president of sales for RealEstate.com.

"The new rules provide more balance between the distressed seller who needs relief, the potential buyer who wants a bargain and the bank who's stuck with the bill," he added.

A short sale occurs when the bank allows the sale of a home for less than the existing mortgage balance -- provided there's a qualified buyer in the wings. Likely short-sale candidates are homeowners struggling with "underwater" mortgages -- a mortgage balance that's larger the home's current market value. First American Core Logic says more than 11.3 million homeowners are underwater on their mortgages.

The complicated sales approach has been troublesome because the bids typically come in well below the last appraisal, and banks don't want the losses. Sellers looking to escape the burden of their mortgages don't want to end up socked with the bank's "deficiency judgment" -- the difference between the sale price and mortgage balance.

Real estate agents and buyers shy away from the short-sale transaction because it can take as long as six months or more to close -- if it doesn't end in a no-sale.

"A major reason why a short sale fails is the length of time it takes to get the lender's approval. Long delays frequently cause the buyer to drop out of escrow and buy another home," said Zdenka Mahan, a short-sale experienced real estate agent with Intero Real Estate Services in Los Gatos, Calif.

Because short sales have been so problematic, other federal programs, including mortgage modifications and special refinancing programs, have been the go-to tools to save homes from foreclosure. But even those programs aren't without their problems.

"I think it's interesting to point out that every single short sale that I do is for a seller who was rejected for a loan modification," said Shawneequa Badger, a real estate agent with Century 21 Alpha in San Jose, Calif.

Still, along with privately selling at a loss, short sales provide one of the last-ditch efforts to avoid a full-blown foreclosure, which has a long-term impact on a consumer's credit standing.

Under Making Home Affordable's Home Affordable Foreclosure Alternatives program, effective April 5 until Dec. 31, 2012, short sales should get easier.

Among the new provisions:

• Eligible homeowners are those who acquired the home as a principal residence before Jan. 1, 2009, and have a mortgage balance no larger than $729,750.


• The owner's monthly mortgage payment (principal, interest, taxes and insurance, as well as any homeowner association dues) must exceed 31 percent of their income, and homeowners must prove financial hardship, such as the loss of income, an increased mortgage payment or other unexpected expense.


• Eligible homeowners also must have been previously considered for other federal foreclosure prevention options, including a refinancing or mortgage modification.


• Instead of having a buyer in hand, homeowners can get preapproved for a short sale before the property is listed, provided the lender agrees upon a minimum acceptable short-sale amount.


• Homeowners who successfully sell short can get up to $3,000 to help defray moving costs after the deal is done. Loan servicers can get up to $1,500 to help cover costs of the deal. Loan servicers can use some of the loan proceeds to buy out subordinate lien holders with payments of up to $6,000, provided the subordinate lien holder agrees to releasing the lien and freeing the homeowner of all liability.


• The lender can't require a cash contribution from the homeowner, nor can the lender require that the owner sign a promissory note at the closing. The lender also cannot go after the borrower for a deficiency judgment based on the difference between the selling price and the last mortgage balance -- as has been the case.


• If the short sale fails, the program comes with a backup deed-in-lieu-of-foreclosure option, where the owner hands over the property to the bank with the same cash incentives.

Just as with the short sale, the lender or servicers can't request any cash from the homeowner, require a promissory note or pursue any deficiency judgments.