A new program added to the arsenal of plans by the White House to help homeowners at risk of foreclosure may be in jeopardy even before it gets off the ground. The short sale plan, implemented this week lacks enforcement powers to require bankers to cooperate and sell homes at a loss.
“There’s not enough money in the Treasury to stop every foreclosure,” said President Barack Obama shortly before his administration released the program. A similar plan aimed at home mortgage borrowers to modify mortgages has been hindered by government red tape and bankers inability to cope with the volume of loans that are in jeopardy of foreclosure.
Under the new plan, the U.S. government provides banks incentives to complete a short sale if they cannot reach an agreement with the homeowner on a loan modification. Ordinarily, bankers would proceed with the foreclosure process when mortgage holders can no longer afford payments.
However, the government would then step in through bankers and offer the mortgage holder $3,000 in moving expenses in exchange for signing a deed-in-lieu of foreclosure instead. The move customarily damages a mortgage holders credit less than a foreclosure, but mortgage experts are uncertain of long term ramifications. Under the plan any excess amount owed on a mortgage would also be forgiven of the mortgage holder.
The bank would be given $1,500 from the Troubled Assets and Relief Program (TARP) for handling administrative costs related to the deed-in-lieu process. But the government may have to come up with more money to make it worth while for bankers to take a loss. The sheer volume of homes that are at risk of foreclosures amounts to nearly 13-million over the next six years.
Banking losses would range into the trillions of dollars, making it impossible for lenders to stay in business without more government aid. The program’s obstacles also include the lengthy time it usually takes for short sales to be approved. Many short sales are never approved, and some homeowners report it takes as long as six to nine months to receive an answer on an offer submitted to purchase a home.
Under the government’s new plan bankers would have to notify mortgage holders whether they have been approved for a short sale within 30 days from the time they apply.
However, many lenders are reluctant to do short sales at all. Bankers are also required to consider the wishes of their investors, who hold legal contracts binding banks to follow their instructions on mortgages as an investment. Going against investors wishes could result in a legal battle that could last years to resolve in court.
Analysts say the only logical next step for the government would be to pay bankers more to “make it worth their while” or keep mortgage borrowers in their homes with additional government aid. A government plan already in the works, the Hardest Hit Fund is designed to help mortgage borrowers at risk of foreclosure in the ten states most heavily impacted by the foreclosure crisis by paying down their mortgages.
The plan would have to be broadened to help more mortgage borrowers at risk of losing homes in addition to the state’s already receiving aid to decrease the number of homes in jeopardy of foreclosure.