In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.
The programme, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to deal with mortgages and risk foreclosure.
Taking effect on April 5, the programme could encourage borrowers to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will have to forgive the difference between the market price of the property and the one owed.
“We want to streamline the short-sale process,” said Seth Wheeler, a senior Treasury adviser.
The problem is highlighted by a routine case in Phoenix. Chris Paul, a real estate agent, has a house he is trying to sell on behalf of its owner, who owes $150,000. Paul has an offer for $48,000, but the bank holding the mortgage says it wants at least $90,000. The frustrated owner is now contemplating foreclosure.
To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash.
Under the programme, the servicing bank will get $1,000. Another $1,000 can go toward a second loan, if there is one. And distressed homeowners will get $1,500 in “relocation aid” from the government.
The short-sales programme could have multiple benefits. For the investment pools that own home loans, there is the prospect of getting more money with a sale than with a foreclosure. For the borrowers, there is the likelihood of suffering less damage to credit ratings.
Under the new plan, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.