Sunday, May 24, 2009

Foreclosure Alternatives Program

The profit motive is the driving force in our economy, but cutting their losses is sometimes the motivating force when business is faced with a hopeless cycle of lost revenue. When the media reports "glimmers of hope" for our ailing economy, the glimmers associated with foreclosure are reported as reductions in the rate of foreclosure. Recently, President Obama's administration provided further incentive to both lenders and borrowers to seek an alternative to foreclosure. The alternatives are not new, but the incentives offered by the program are.

It's sad to think that significant numbers of borrowers do not find incentive enough in the alternatives to foreclosure, but the number of foreclosures testifies that they are willing to endure greater hardship than necessary when they fall into hard times. Now, under the new program, borrowers will also be giving up financial aid if they do not take advantage of the alternatives. Additionally, this is especially good news for borrowers who took advantage of the alternatives under the Making Home Affordable Loan Modification Program, but fall into further financial difficulty and are unable to keep their home.

On May 14, 2009, President Obama's administration responded to the call from the National Association of REALTORS®, and announced incentives and uniform procedures for short sales under what is termed the Foreclosure Alternatives Program (FAP). Under the program, a lender may consider a short sale or a deed-in-lieu of foreclosure if the home does not sell. Participating lenders who sign on to the program must comply with its requirements so long as they do not conflict with contractual agreements with investors. Thus far, the leading lenders who hold 75% of the outstanding mortgage debt have signed on with the program.

The principal features of the program are:
  • Financially stressed borrowers (homeowners) qualify under the FAP if they meet minimum eligibility requirements for the Home Affordable Modification program but don’t qualify for a modification or do not successfully complete the three month trial period.
  • Before proceeding with a foreclosure, lenders must determine if a short sale is feasible.
  • Incentives include:
    • $1,000 for lenders on successful completion of a short sale or deed-in-lieu of foreclosure;
    • $1,500 for borrowers/homeowners to help with relocation expenses; and
    • $1,000 toward the cost of paying junior lien holders to release their liens (one dollar from the government for every $2 paid by the investors to the second lien holders).
  • The program will include:
    • Standardized documents which are simplified, including a Short Sale Agreement and an Offer Acceptance Letter.
    • Property Valuation by Appraisal or Broker's Price Opinion issued no more than 120 days before the date of the short sale agreement. Lenders will independently establish the property value and minimum acceptable net return, in accordance with investor requirements.
  • In the Short Sale Agreement, lenders must give borrowers up to one year, but no less than 90 days to sell the property, depending on market conditions. Lenders have the option to grant extensions of the time period specified in the agreement.
  •  No foreclosure may take place during the marketing period
  • The property must be listed with a licensed real estate professional with experience in the neighborhood.
  • The Short Sale Agreement must specify the reasonable and customary real estate commissions and costs that may be deducted from the sales price. The servicer must agree not to negotiate a lower commission after an offer has been received.
  • Lenders may not charge fees to borrowers for participating in the program.
  • Lenders have the option to require the borrower to agree to deed the property to the servicer in exchange for a release from the debt if the property does not sell within the time specified in the Short Sale Agreement.
  • The program is in effect through 2012.
As limited as the alternatives to foreclosure are—they may not be win-win—they are better than losing everything. The Monopoly board game suggests the only other alternative to taking advantage of the program, inaction: Go to foreclosure. Do not pass Go. Do not salvage what you can of your credit. Do not collect your $1,500.

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