The Treasury Department unveiled sweeping rules this week to help financially troubled homeowners who need to sell but can't get a price high enough to pay off their mortgages. Home- owners will even get $1,500 to help cover their moving costs.
The plan is designed to help homeowners who don't have the income or debt levels to qualify for a loan modification under the Obama administration's $75 billion Making Home Affordable program. The plan establishes time lines, a standard for process and documents and cash incentives for participation.
"There's always efficiency with uniformity," said Vicki Vidal, associate vice president of government affairs at the Mortgage Bankers Association. "It makes it easier for the parties involved to know what to expect."
Short sales, as these deals are known, reduce the damage to the borrowers' credit record and save the lenders the cost of foreclosure. Short sales also help neighboring property values because the sales price is usually higher than what the house would fetch in a foreclosure auction.
About one in 10 home sales this year was a short sale, or an estimated 500,000 sales, according to the National Association of Realtors. In South Florida, Las Vegas and California, the ratio is far higher.
To qualify under the new guidelines:
• The property must be the homeowner's principal residence.
• The homeowner is delinquent on the mortgage or default looks likely.
• The loan was made before Jan. 1 this year and is less than $729,750.
• The borrowers' total monthly mortgage payment exceeds 31 percent of their before-tax income.
But the Treasury Department's plan for short sales has some shortcomings. Mortgage companies don't have to launch the program until April 5. The program is also voluntary for lenders who hold second mortgages, such as home equity loans or piggy-back loans. The Treasury Department has estimated that about half of homeowners in default have more than one loan on their properties.
Mortgage companies will have to approve short sale terms, including the minimum listing price, before the house is put on the market, which should speed up the approval process. Mortgage companies will receive $1,000 to cover administrative costs.