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Federal Incentives Coming for Short Sales

Nearly one-third of all existing homes sold were either short sales or foreclosures, according to monthly data compiled by the National Association of Realtors (NAR), and according to testimony by Federal Housing Administration (FHA) commissioner David Stevens, the mortgage servicing industry is about to see details of an incentive program aimed to prevent foreclosures by encouraging servicers to pursue short sales and deeds-in-lieu of foreclosure. The program is being finalized and will be announced as soon as possible – possibly later this month. “Because we know that the MHA program will not reach every at-risk homeowner or prevent all foreclosures, on May 14th the Administration announced the Foreclosure Alternatives program that will provide incentives for, and encourage, servicers and borrowers to pursue short sales and deeds-in-lieu of foreclosure in cases where the borrower is generally eligible for a MHA modification but does not qualify or is unable to complete the process,” he said. Yes, in case you’re wondering, this is the same program announced in April – government moves slowly.

Details on federal incentives for short sales

It’s hard to know beforehand what’s coming down the pipeline, but this is what we’ve got so far: Under the Treasury plan, servicers would get a $1,000 "success fee" when a short sale is completed. The home seller would receive up to $1,500 to assist with relocation expenses, similar to the "cash for keys" programs that various servicers offer. Treasury officials are working with an advisory committee to determine how to accommodate the holders of second liens. "Second liens have been a considerable problem for short sales," said Matt McCabe, the president of Loan Resolution Corp., a Scottsdale, Ariz., company that helps lenders work out defaulted mortgages. Currently there is no uniform policy for banks to accept a payoff for a second lien in order to complete a short sale. Many of the largest banking companies have adopted their own internal policies, which vary. For example, in March, Bank of America Corp. adopted a new policy requiring that 5% of the short sale proceeds go to pay the second lien in situations where there is no equity available, particularly for standalone home equity lines of credit. (B of A's old policy required that 10% of the balance of the home equity loan be paid.)

Short sales help avoid repossessions

Fewer homes were repossessed in August than in July, but just as many Americans were behind on their mortgage payments, according to a report released today by RealtyTrac, an online marketer of foreclosed properties. The number of homes that lenders actually took back from borrowers fell 12.7%, leaving a total of 540,222 homes repossessed so far this year. Banks take big losses on repossessions, so they may leave delinquent borrowers in their homes under the assumption that they’ll maintain the properties, thereby saving banks the time and expense of upkeep and maintenance. Plus, there is always hope that some of these borrowers will catch up on their loans without assistance -- a recent report from the Boston Federal Reserve found that 30% of borrowers who have missed two mortgage payments eventually become current. Increases in short sales could also be reducing the repossession statistics, since a lot of banks are delaying the foreclosure process if they see any kind of chance of making a reasonable short sale. The reprieve in repossessions could be coming to an end, however, since a Fitch Ratings report forecast that of the $200 billion in option ARMs outstanding, $29 billion will reset to fully amortizing loans by year's end, and another $67 billion will reset in 2010. The average payment increase will be 63%, or $1,053 a month -- an impossible hurdle for many borrowers.

Homebuyer tax credit helping the housing market recover

According to the Federal Reserve’s Commentary on Current Economic Conditions, also known as the Beige Book, the first-time homebuyer tax credit is helping the housing market recover, especially in the low end of the market for much of the country. The Chicago, Richmond, Boston, and San Francisco Districts experienced an increase in sales over the past six weeks, while the Boston, Cleveland, Dallas, Kansas City, Richmond, and New York districts reported the first-time homebuyer tax incentive contributed to increased sales. Philadelphia reported steady activity. Most districts reported sales below the last year’s levels, but the Atlanta, New York, Cleveland, and Minneapolis districts experienced year-over-year gains in select markets. The St. Louis district reported residential home sales had not improved in the Midwest.

Jobless claims down

The Labor Department announced in its weekly report that the number of Americans filing for initial unemployment insurance fell last week, and ongoing claims also dropped. There were 550,000 initial jobless claims filed in the week ended Sept. 5, down 26,000 from a revised 576,000 the previous week, and less than the 560,000 new claims a consensus of economists surveyed by Briefing.com had forecast. The 4-week moving average of initial claims was 570,000 down 2,750 from the previous week's revised average of 572,750. We're still talking about declining at a slower pace, not outright job growth," said Tim Quinlan, analyst at Wells Fargo (that’s something to keep in mind in this era of announcing that things are “getting better” because they’re getting worse more slowly). The government said 6,088,000 people filed continuing claims in the week ended Aug. 29, the most recent data available. That's down 159,000 from the preceding week's revised 6,247,000 claims. The 4-week moving average for ongoing claims fell by 37,750 to 6,182,500, down from the prior week's revised average of 6,220,250.