Mortgage Law, Mortgage Modification, Foreclosure: Making Home Affordable Program Alternatives to Avoid Disclosure
The MHA, as discussed above, helps borrowers avoid foreclosure by modifying mortgage payments. However, there are just many situations where a borrower, who otherwise qualifies for the program, still doesn't qualify for a modification. To address this situation, the program also has incentives for borrowers, servicers and investors to encourage short sales and deeds-in-lieu. Both allow families and servicers to avoid the costly foreclosure process, and to minimize the negative impact of foreclosures on borrowers, financial institutions and communities.
First we should explain what a Short Sale or a Deed-in-Lieu is. In a short sale, the servicer allows the borrower to sell the house at its current fair market value, even if that amount won't cover the amount owed on the mortgage. In a depreciated market such as our current housing market, this is a common occurrence. If the sale is approved, the borrower is relieved of the difference owed and the sale price. For instance if you owe $500,000 on your house and the house's current fair market value is appraised at $400,000; you would conduct the short sale offering $400,000. If sold, the bank would accept the $400,000 to pay off the entire $500,000 loan balance. Of course this is a simplified example that doesn't even include sales costs and such. This works because the bank realizes that a foreclosure is expensive and that even in an ideal foreclosure situation the result would be an auction sale of fair market value. This would still result in the same loss of $100,000 not including all the foreclosure costs. Thus time, effort, and money can be saved this way.
If the borrower actively markets the property but is unable to sell it within the agreed upon time period, a servicer may consider a Deed-in-Lieu (DIL). With a DIL, the borrower voluntarily transfers ownership of the property to the servicer – provided the title is free and clear.
Historically Short Sales and DILs have not been pursued, rather the servicers have gone after foreclosures. The reason is that these transactions are complex and involve careful coordination of servicers, appraisers, borrowers, purchasers, real estate brokers, title agencies and often mortgage insurance companies and junior lien holders.
The MHA Foreclosure Alternatives Program simplifies and streamlines the short sale and DIL process by providing a standard process flow, minimum performance time frames and standard documentation. To compliment a standardized approach, Treasury provides incentives to borrowers, servicers and investors to pursue short sales and DILs. Our next post will begin to flesh these incentives out.
