Treasury Moves to Offer Rewards for Short Sales

The Treasury Department announced this month that it is close to finalizing a widened incentive program to entice lenders and servicers to rely more on short sales as an alternative to foreclosure.

“Presumably, the Treasury is trying to help facilitate a transaction that will result in less loss to the lender than in the case of a foreclosure,” the California-based John Burns Real Estate Consulting said in a recent research note that reacted to the news.

That program – part of an initiative unveiled in May – expands on the Obama administration’s Home Affordable Modification Program, which has had a mixed record in mitigating housing losses in the U.S. economic downturn. Of the scores of troubled homeowners eligible for loan modifications under the program, only 12 percent have received refinances, according to Treasury figures.

Scant modifications have contributed to an avalanche of foreclosure filings, unleashing a flow of repossessed housing in “shadow inventories” – a property glut that could drive home prices down and threaten the market’s recent modest gains. As DS News previously reported, some analysts estimate that shadow inventory could rise as high as 7 million units, foreshadowing a new housing crash.

That prospect – and the high costs of the foreclosure process – are two reasons government regulators are pushing short sales, in which defaulting homes are sold for less than the outstanding mortgage balance. Because the homes are sold for what the market will bear, the new owner is less likely to get “underwater,” owing more than the mortgage is worth. That’s a key predictor of a borrower’s likelihood to default.

“What they are trying to do is move some of these foreclosures in the pipeline, and bring them to a resolution before (foreclosure) happens,” Lisa Marquis Jackson of the California-based John Burns Real Estate Consulting told Reuters this week. “Twelve percent of these being modified isn’t enough to clean these up.”

Even short sales come at a cost, however. Realtors complain that lenders are prickly in short sale negotiations, often taking half a year to close them. Longer administrative delays raise the likelihood of a prospective buyer losing interest in a deal.

Under the upcoming Treasury plan, as much as $10 billion of government funds dedicated for loan modifications will be used to give lenders catch-up payments, to assuage their fears that property values could continue to fall.

The payments still have to be worked out, but one Treasury proposal has been to offer lenders $1,000 for going along with a short sale, and the same amount for deed-in-lieu transactions with similar results.

Borrowers also would be in line for incentives – possibly $1,500 in closing fees – for agreeing to a short sale or deed-in-lieu. Second lien holders could receive nearly as much – $1,000 – for signing away any claims in those sales, the Treasury said.

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