by Broderick Perkins
(04/05/2010) A short sale alternative to foreclosure, one that pays home owners to sell at a loss, is the latest home owner bailout tool the feds are putting to work.
Effective today, April 5, the Obama Administration rolled out Make Home Affordable's Home Affordable Foreclosure Alternatives (HAFA) short sale effort to help home owners avoid foreclosures by giving them up to $3,000.
Lenders and servicers can also get $1,000 each for short sale deals that pencil.
A short sale occurs when the bank allows the sale of a home for less than the existing mortgage balance, typically provided there's a qualified buyer in the wings. Such homes are often held by home owners struggling with "underwater" mortgages -- mortgages with balances larger than the value of the home.
First American Core Logic says more than 11.3 million home owners are underwater on their mortgages.
All are strategies to avoid foreclosure, but banks have been more likely to refi, modify or foreclose, rather than take the more trying short sell route.
Short sale bids often come in well below the last appraisal and banks don't want to take the hit. After sellers seal the deal they can be left with a bill that's the difference between the selling price and the mortgage balance. Real estate agents and buyers fear a six month or longer transaction period that could end in a no-sale scenario with time-spent costs attached.
HAFA attempts to remove some of those obstacles.
The new HAFA short sale plan, in the works for months, has been retooled to help clear the log jam of homes in limbo.
HAFA short sales are available for principle residences acquired before Jan. 1, 2009 and have mortgage balance no larger than $729,750. Also, the owner's monthly payment must exceed 31 percent of their income and home owners must prove financial hardship.
Eligible home owners also must have been previously considered for other federal foreclosure prevention options, but must be considered for the HAFA short sale before the loan is referred to foreclosure.
The lender can't require a cash contribution from the home owner, nor can the lender require that the owner sign a promissory note at the closing. The lender also cannot go after the borrower for a "deficiency judgment" based on the difference between the selling price and the last mortgage balance.
Home owners in successful short sales can get up to $3,000 to help with moving costs. Lenders and services $1,000 each to help cover costs of the deal.
Home owners can get pre-approved for a short sale before the property is listed and the lender will tell the home owner the minimum amount acceptable in a short sale.
If the short sale fails, the program comes with a deed-in-lieu-of-foreclosure option -- the owner hands over the property to the bank and, just as with the short sale, the lender or servicers can't request any cash from the home owner, require a promissory note or pursue any deficiency judgments.