Starting on April 5, the new program could encourage hundreds of thousands of people who are behind in their mortgage payments to sell their homes at a loss via a “short sale.” The program will compel lenders to accept the sale and forgive the difference between the sale price and the amount owed on the mortgage.
The Times reports that under the new program, the bank servicing the mortgage will get $1,000 for their trouble. (Another $1,000 can go toward a second loan, if there is one.) And then, the government would give $1,500 to the distressed homeowners as “relocation assistance.” So, in effect, homeowners will have an incentive to sell that condo they bought for $100,000 to the next bidder offering $48K.
The thinking is that such incentives would actually create legitimate transactions, which would help establish price stability in the market. Given that the bank has to eat the difference between the loan value and the sales price, the administration assumes the sales prices will be “real.”
Since foreclosed properties tend to be ransacked and drag down prices in an area, fewer foreclosures is also expected to be a good thing for prices. In addition, the owners of mortgages might actually receive more money from the “short sale” than they would under a foreclosure situation – and then there is the added benefit that no new property would be put the books to deal with.
For the homeowner, there is the benefit of getting out from under a untenable situation with a little cash in their pocket as well as the fact that a short sale does not damage their credit rating the way a foreclosure would. And since the property has been sold, there is no chance of the homeowner being sued by the lender down the road.
Sounds like a win-win situation, right? Well not quite. Somebody somewhere has to eat the difference between what the homeowner owes and can get from the sale. But given the administration’s view that the banks should pay to clean up the mess that was made, their view is that it is fine for the banking industry to eat the losses. Never mind the fact that most banks servicing mortgages had absolutely nothing to do with the alphabet soup of derivative securities that really caused the problem. But this little detail isn’t a concern at the present time.
So, will the White House’s new plan finally put an end to the decline in housing prices? We’re not terribly confident this plan will work on a broad scale, but we will give them a little credit for trying.
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