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Banks could get government incentive payments for allowing borrowers to sell their home at a loss rather than go through foreclosure, under guidelines recently issued by the Obama Administration.
The program, known as Making Home Affordable (MHA), focuses on paying lenders to modify distressed borrowers’ loans to affordable levels. MHA provides $75 billion for sustainable mortgage modifications through the Home Affordable Modification Program (HAMP). Under this program, lenders can also receive incentive payments even if the homeowner’s loan is not modified.
In those cases, the lender could get up to $1,000 for allowing a short sale. In such deals, the lender accepts less than the value of the mortgage in what has usually been a time-consuming and cumbersome process. Under the plan, the government will also share the cost of extinguishing second liens on the property, such as those for second mortgages.
If the short sale fails, the borrower can turn over their house keys in a process known as “deed in lieu of foreclosure,” transferring ownership to the lender without a foreclosure. At the end of the process, the homeowner could be eligible for $1,500 for relocation expenses.
“If a modification is not possible, we are also announcing steps to encourage the quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future,” Treasury Secretary Timothy F. Geithner said. “These are critical steps in stemming the foreclosure crisis and stabilizing the housing market.”
The additions to the program are an acknowledgement by government officials that not all distressed borrowers will be able to save their homes. Despite government efforts, lenders are starting the foreclosure process on an increasing number of homes.
The program’s expansion also includes a $10 billion feature that protects lenders from losses associated with falling home prices. If a lender modifies a loan and the homeowner redefaults, the lender faces more severe losses if home prices have fallen in the interim.
The new incentive will encourage loan modifications in places where home values have dropped severely, according to a summary of the program. It reduces “the risk of loss to lenders from modifications compared to alternatives that could result in the loss of homeownership,” the summary said. Call Jan at 757-329-4714 or visit my website at
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