December 6, 2009 by  

Now fueled to a growing degree by prime borrowers, the foreclosure crisis is not abating, and U.S. Treasury officials are hoping new incentives will accelerate short sales and other alternatives to rescue homeowners.

Starting on April 30, amendments to the government’s Home Affordable Modification Program (HAMP) will offer new incentives to lenders to accelerate short sales or DILs.

New Treasury guidelines for foreclosure alternatives will require lenders to consider borrowers for a short sale on their primary residence 30 days after missing two consecutive payments on a modified loan or after the borrower requests a short sale.

U.S. officials are also offering incentives. It will pay up to $1,500 for a homeowner to relocate; $1,000 to lenders that accept a sale to cover processing expenses, and a maximum of $1,000 to help settle a second mortgage or subordinate lien. The Treasury plan requires that borrowers be fully released from future liability for the debt.

This year, lenders are increasingly resorting to the foreclosure alternative, with figures showing a tripling of short sales in the first half of 2009, compared to last year. But U.S. Treasury and bank regulatory officials say foreclosures are still greatly outpacing the alternative of short sales or DILs, deeds-in-lieu of foreclosure. For every short sale or DIL as of the first half of 2009, there were 23 foreclosures, according to the Office of the Comptroller of the Currency.

In a short sale, the lender allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the mortgage.

In the much less common, deed-in-lieu of foreclosure, the borrower voluntarily transfers ownership of the mortgaged property to the lender to fully satisfy the total amount due on the first mortgage. The lender’s approval is contingent upon the borrower’s ability to provide marketable title, free and clear of mortgages, liens and encumbrances.

According to the Treasury, the new incentives simplify and streamline the use of short sales and DIL options by incorporating the following features:

• Complements HAMP Program by providing viable alternatives for borrowers who are eligible.
• Utilizes borrower financial and hardship information collected from HAMP program, eliminating the need for additional eligibility analysis.
• Allows the borrower to receive pre-approved short sale terms prior to the property listing.
• Prohibits the lender from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement.
• Uses standard processes, documents and timeframes.
• Provides financial incentives to borrowers, servicers and investors.