Obama Short Sale Plan Avoids Foreclosure with Less Debt

A new initiative by the Obama Administration in its slow-moving and often-criticized foreclosure rescue effort will now offer a short-sale alternative that includes some principal forgiveness and $1,500 in “relocation” assistance to borrowers.
The plan kicking off April 5 — Home Affordable Foreclosure Alternatives, or HAFA – is for homeowners who have already qualified for the government’s primary foreclosure-prevention campaign, the $75 billion Home Affordable Modification Program, HAMP, and have failed to complete its reduced-mortgage payments trial.
The new program takes borrowers off the hook for owing the difference between the balance of mortgages and the short sale price. Under HAFA, up to $3,000 would go to holders of second mortgages and borrowers get the $1,500 to help them move.
HAFA guidelines allow borrowers to receive pre-approved short sales terms before listing the property, and requires borrowers to be fully released from future liability for first mortgage debt.
Before a borrower is approved for a HAFA short sale, the mortgage servicer “must determine the minimum acceptable net proceeds (minimum net) that the investor will accept from the transaction,” HAFA guidelines state. “Each servicer must develop a written policy, consistent with investor guidelines, that describes the basis on which the minimum net will be determined.”
Short sales can be cheaper than the prolonged foreclosure process for banks and they prevent foreclosed and abandoned properties from adding to neighborhood blight and under-valuing. But short sales are also hampered by second-liens and reluctance from banks to take significant losses.
U.S. officials are trying to restrain the foreclosure crisis as ominous signs emerge, including the unabated foreclosure filings still hitting some states. And a potential of higher rates of filings in months to come as more homeowners find themselves “underwater,” or owing more on their homes than the value of the properties.
Moreover, HAMP has fallen short after a year of targeting more than 3.4 million eligible borrowers, those 60 days late on their mortgages. Only 116,000 borrowers have been given permanent mortgage reductions through January – a 3 percent rescue rate.
HAFA has already come under fire from appraisal groups for allowing “broker price opinions,” or BPOs, to become part of the process. BPOs are estimated values of a property as determined by a real estate broker.
Four organizations representing more than 35,000 real estate appraisers sent a letter to U.S. Treasury Secretary Timothy Geithner saying that BPOs will encourage loan modification fraud – including fraud involving short sales as a new form of mortgage fraud.
“We urge the Department to reestablish independence in the valuation process to protect the safety and soundness of financial institutions, improve transparency, and safeguard the public trust,” the appraiser organizations’ letter said.