The Treasury Department announced this month that it is close to finalizing an incentive program to encourage lenders and servicers to rely more on short sales as an alternative to foreclosure.
There are two reasons that the government is looking at rewards for short sales – the high cost of the foreclosure process and the prospect of a new housing crash created by the lack of modifications that have been implemented under the Home Affordable Modification Program. According to most figures, only 12% of troubled homeowners have been helped by the modification program.
The incentive to push short sales as an alternative to the possibility of a new foreclosure avalanche is at the heart of the Treasury plan. Because the homes are sold for current market value, the new owner is less likely to get “underwater”; owing more than the mortgage is worth. That’s a key predictor of a borrower’s likelihood to default.
Details of the plan continue to be worked out, but one proposal has been to offer lenders $1000 for the short sale, and the same amount for deed-in-lieu transactions. Additionally, borrowers would also be in line for incentives, possibly as much as $1,500 in closing fees, and 2nd lien holders could receive up to $1,000.