Short Sale Blog

Responding to concerns that homeowners are not finding relief through loan modification efforts, the federal government is rolling out a new short sale incentive program on April 5th.

At the heart of the program are incentives and cash payments, directed at the loan servicers, junior lien holders, and homeowners. The loan servicer will now receive $1,000 for a short sale, up to $3,000 is available to the junior lien holder, and $1,500 is available for homeowners, for 'relocation assistance.'

The program is not without challenges and potential large problems that will hold is back from being truly effective.

First, the program is voluntary. While loan servicers might be more open to processing short sales, due to the financial incentive, the final approval for a short sale transaction is still made by the investor who owns the loan.

Second, the junior lien holders can kill a deal if they want more money than the $3,000 that is allocated to them. At Seattle Short Sales, we find that here in the Seattle area, many homeowners have HELOCs and seconds with balances of $75,000-$100,000. Typically, those lenders are asking for 10% or more of the principal balance, in order to release the lien. So, in many cases we may see a situation where the lien holder wants $4,000-$15,000 more than they are being allowed by the foreclosing first lien holder.

Third, in the federal short sale program, the junior lien holder is instructed to release the borrower from any deficiency balance. I don't see that happening in any great scale. If a lender is holding a $100,000 HELOC note, it is highly doubtful that three thousand dollars will compel them to give up the rights to collect $97,000. In Washington state, in a trustee sale, only the foreclosing senior lien holder loses their deficiency rights. The junior lien holder retains their deficiency rights. And, we have found, in the short sale approval letters granted by junior lien holders, they typically retain their deficiency rights.

So, there is some good news to the new federal short sale program. Homeowners may receive a payment, and some lenders will be compelled to approve more short sales.

In the end, in order to get junior liens released, it will be back to the grindstone for short sale negotiation companies. The use of creative deal structuring where the buyer brings in additional funds to contribute towards the excess demands of junior lien holders will continue to be very important.