Yesterday, the government announced an additional program under the Making Home Affordable Plan. In light of the fact that some homeowners still can’t afford their homes after a loan modification, the government is now creating a program that would encourage banks to accept a short sale or deed-in-lieu rather than foreclosing.
Why Avoid Foreclosure?
The simple fact is that foreclosed homes lose value fast. They also decline in condition after the foreclosure because no one is maintaining them. Unfortunately, short sales take longer to process because of all the paperwork involved, and many lenders are resistant to short sales. They’d rather foreclose and just have it be done with. That’s not good for homeowners or communities.
Details of the New Program
Details of the new program are still coming out, but basically the government will offer banks cash incentives for accepting short sales and deed-in-lieu agreements instead of foreclosing. They will also lay out a streamlined process to help short sales close faster. Right now it can take at least 2 months to close a short sale. 4-6 months is typical.
Who Will Qualify
The qualifications for Making Home Affordable still apply. You must be eligible for a loan modification under the current plan, but unable to meet the new payments. This is common because many borrowers have seen payments stay the same or even go up after fees and past due balances are tacked onto the loan balance.
Under the original plan, you must be the owner-occupant of the home and be current on your payments. The original plan only modified loans up to 105% of the original loan amount. It’s unclear whether the new plan would include homes that have lost significantly more value, which is typically the reason for the short sale in the first place.
I Support This Plan
I don’t support many of the new programs, but I do support this one. Although foreclosures result in lower home prices, buyers have many fewer protections and more costs. In a traditional sale, the seller discloses everything they know about the property, including defects. They also usually pay for a termite inspection and may make repairs to the property. In a foreclosure, the bank discloses what it knows, but that usually isn’t much. The buyer is responsible for all inspections and the bank will rarely agree to repair anything. In a short sale, the owner offers the same disclosures as a traditional sale and may pay for the pest inspection to help move the process along. Although most aren’t required to make repairs, some sellers will be willing to. Most of all, the home is generally occupied during the process, so you don’t have to worry about vandals or thieves stripping out wires, plumbing, or fixtures.
With so many foreclosed homes still waiting to come to market, it doesn’t make sense to add more to the pool when banks stand to lose less money by agreeing to short sales.