New plan to help defaulting US homeowners

It will allow owners to sell for less than they owe and give them cash as well

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

The new programme, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

More than five million households are behind on their mortgages and risk foreclosure. The government’s US$75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.

For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery – the last thing it wants in an election year.

Taking effect on April 5, the programme could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification programme to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage.

Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

‘We want to streamline and standardise the short sale process to make it much easier on the borrower and much easier on the lender,’ said Seth Wheeler, a Treasury senior adviser.

The problem is highlighted by a routine case in Phoenix. Chris Paul, a real estate agent, has a house he is trying to sell on behalf of its owner, who owes US$150,000. Mr Paul has an offer for US$48,000, but the bank holding the mortgage says that it wants at least US$90,000. The frustrated owner is contemplating foreclosure.

To bring the various parties to the table – the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property – the government intends to spread its cash around.

Under the new programme, the servicing bank, as with all modifications, will get US$1,000. Another US$1,000 can go towards a second loan, if there is one. And for the first time, the government would give money to the distressed homeowners themselves. They will get US$1,500 in ‘relocation assistance’.

Should the incentives prove successful, the short sales programme could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.

For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.

For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighbouring homes.

Source: Business Times, 9 Mar 2010