Obama unveils the first part of his housing rescue plan in February.
The additions to Obama’s housing plan that were laid out on Thursday are designed to make it easier for homeowners to sell houses that are worth less than their mortgages. The initiative will help incentivize short sales as well as “deed in lieu” transactions. These proposals will hopefully help assist borrowers who cannot be helped by a loan modification.
“The government will pay mortgage-servicing companies up to $1,000 and borrowers up to $1,500 for successful short sales or “deeds in lieu” transactions.”(WSJ) The government will also spend up to $1,000 to help get the holders of second mortgages to release their liens so the short sales or “deeds in lieu” transaction can be completed. In addition, additional payments will be provided to lenders, servicers, and investors in areas where home prices have been dropping to assist with loan modifications. These funds will hopefully help make investors feel more comfortable modifying loans, rather than being overly concerned that they will face additional losses if the modified loans redefault.
So far 75% of loans are currently being covered by the plan, including those by Bank of America, Citigroup, J.P. Morgan Chase and Wells Fargo. Other companies are evaluating whether they wish to participate.
Given that short sales have accounted for 15-20% of existing home sales this year according to the National Association of Realtors, this new program should provide benefits to investors, lenders, servicers and borrowers looking to sell homes or find other ways out of underwater mortgages and tough financial situations. Hopefully it will help make short sales easier to complete and make foreclosure easier to avoid.
If the popularity of the loan modification plan unveiled by the administration nearly three months ago is any indication, this program should be a huge success.
The plan also has positive ramifications for the reverse mortgage industry due to the new HECM for Purchase program. Negotiating a short sale is often part of the process of a reverse mortgage when the borrower is trying to avoid a foreclosure or underwater on their previous mortgage. Hopefully, this plan will make reverse mortgages that fall into this category easier to obtain as well.