WASHINGTON — The Obama administration unveiled new programs Thursday designed to make it easier for homeowners who owe far more than their houses are now worth to sell those homes at a loss and have their remaining debt forgiven.
The programs, announced by Treasury Secretary Timothy Geithner, are the latest additions to Making Home Affordable, an evolving $75 billion plan that tries to break the national housing crisis into separate pieces, attacking the problem on several fronts.
The first two legs of the program sought to help borrowers refinance into today's low mortgage rates, or if they're behind on payments, to seek loan modifications to avoid foreclosure.
President Barack Obama described these steps at a town hall meeting in Albuquerque, N.M. on Thursday: "The bank has to lose a little bit of money on what they were expecting on principal and interest. On the other hand, the homeowner, if they make this agreement with the bank, they've got to agree that when prices start going up again they give up a little bit of equity to repay the bank. But either way, everybody is better off, including the community, if people stay in their homes."
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Thursday's announcements address situations where borrowers can't qualify for either of those programs and are at risk of losing their homes. The administration will now provide additional financial incentives to lenders willing to help homeowners unload their properties at a loss when they owe much more than the present-day value of their homes.
The incentives apply to lenders who agree to allow homeowners to conduct short sales or deed-in-lieu transactions instead of going into foreclosure and dragging down prices for neighbors and adding to the already large national inventory of empty homes.
In a short sale, borrowers sell their home at current market value and all proceeds go to the lender. The homeowner is then no longer responsible for the difference between what they owe and the home's sale price. There's still a hit to a borrower's credit rating, but not as damaging as it would be in a foreclosure.
When there are no buyers, lenders sometimes accept a deal in which the borrower transfers ownership of the property to the loan servicer — who acts as a bill collector for investors who own pools of U.S. mortgages. This sort of deal is shorthanded as a deed-in-lieu of foreclosure, or deed-in-lieu.
Under the new plan, servicers will receive compensation of up to $1,000 per short sale or deed-in-lieu transfer accepted. As an incentive to avoid foreclosure, borrowers could be paid up to $1,500 in relocation expenses. Since many homes have second mortgages, Treasury will pay lenders up to $1,000 to accept the deals instead of going to foreclosure.
Borrowers will get 90 days to achieve a short sale, and must list it with a licensed real-estate agent. Borrowers in areas of severe market downturn — such as Florida, California and declining industrial states — will get up to a year to reach a short sale. After that, deed-in-lieu transfers occur.
To discourage borrowers from simply unloading their homes, they must first be deemed unable to get a loan modification. The program is voluntary for most lenders, but mandatory for banks that received taxpayer bailout money.
For homeowners in states where home prices have fallen sharply, the administration also rolled out Thursday a complex insurance program that will protect lenders from further home price declines when they are willing to modify loans. That program is capped at $10 billion.
The cost of all these new programs will be paid from a $50 billion pool of taxpayer bailout money set aside to address the housing crisis.
Experts welcomed Thursday's initiative.
"We have heard from realtors that the extensive delay in the short sale process had caused many buyers to go elsewhere and have left many would-be sellers with no option but foreclosure," Charles McMillan, a Dallas realtor and president of the National Association of Realtors, said in a statement. "We are all pleased that the government has stepped in to help homeowners and those wishing to buy a home,"
Rick Sharga, the senior vice president of RealtyTrac, a foreclosure research firm in Irvine, Calif., said the effort will face hurdles, however.
"A lot of the investor-owned loans have (private mortgage) insurance. From the investors' perspective, they're going to be better off foreclosing, collecting the insurance, then disposing of the property," he said. "Short sales, unfortunately, are a 20th century solution to a 21st century problem."
RealtyTrac publishes widely cited foreclosure statistics. Its latest findings, as of April, showed more than 1 million property owners currently in foreclosure proceedings.
"It's actually a fraction of what's out there, and that doesn't even get to the seriously delinquent loans that aren't in foreclosure," Sharga said.
The deed-in-lieu transfers might prove more successful, he said, because some areas with severe home price drops have many homeowners who owe significantly more than their homes are worth.
"In a lot of those cases, it is a better-than-nothing scenario for everybody involved. The homeowner largely has incentive to walk away anyway," Sharga said. "I can see where the deed-in-lieu part of this could be more of a solution in places like California and Florida."
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