Banks Open to Short Sale As Foreclosed Home Prevention

by Donald Hanz on Foreclosure Help

Last week, the Obama Administration announced an expanded version of its $75 billion Making Home Affordable program as part of an effort to reduce the number of forclosed home. The enhancement offers incentives to lenders who allow a short sale. The original version of the program only focused on giving incentives to lenders who modify loan terms to make them affordable for distressed homeowners.

The expanded program focusing on short sale as a way for distressed homeowners to avoid foreclosure has been welcomed by lenders who said that proposed changes in the mortgage industry could boost the number of short sale transactions.

According to the Treasury Department, it plans to increase the incentives that it would give to lenders if they allow borrowers to opt for short sale to avoid losing their homes to foreclosure.

The short sale process needs the complete cooperation of mortgage lenders or banks because they have to agree to accept a discounted payment for the loan balance due. The process allows homeowners to sell their distressed properties for less amount than what they owed to their lenders.

A typical short sale agreement requires homeowners to turn over the total proceeds of the home sale to their mortgage lenders or bankers with the understanding that the amount represents the full settlement of their debts.

According to Lynx Mortgage Bank executive vice president Andre L. Mitchell, lenders are more than willing to eliminate nonperforming and bad loans through short sales.

Meanwhile, real estate management executive of Bank America, David Sunlin said that since the foreclosure crisis, lenders have been awaiting for directions from the government on how to deal with the problem. He pointed out that Bank of America has made some changes on its policy to encourage more transactions of short sales.

The bank used the recommendation from the government-controlled mortgage finance provider, Federal National Mortgage Association and provided second lien holders nearly 10 percent of their mortgage balance in short sale transactions where it is the first lien holder.

Additionally, if the bank was the holder of the second lien, it required holders of the first lien to forego the amount in short sale transactions. The new policy of the Bank of America provides that it will accept 5 percent of the total net proceeds of a short sale if it is the holder of the second lien.

In hindsight, banks and lenders encourage short sales as forclosed home prevention method because they incur only less expense compared with doing foreclosures.