Troubled homeowners can stop home foreclosures through the federal short sale program launched last November 2009 and enhanced for the April 2010 launching despite the obvious loopholes.
Among the loopholes are the obvious hesitation of lenders to work out short sales because of the big gap between the loan amount and the short sale price, the difficulty in pinpointing the short sale price fair to lenders and the problem of second mortgages.
Nevertheless, the Obama administration is pushing through with the short sale program to help solve the foreclosure problem which has not been solved by earlier programs such as the Home Affordable Modification Program and the HARP and the HOPE programs.
Just like the HAMP and HARP, the federal government also gives incentives to the lender or servicer, to the second-mortgage holder and to the homeowner. The primary lender gets $1,000; the second-mortgage lender gets another $1,000; and the homeowner gets $1,500 for relocation expenses.
For troubled borrowers, this short sale scheme to stop home foreclosures has two advantages over foreclosures: less damage to personal credit ratings and the pledge that they will not be pursued for the deficiency between the final sales price and the loan amount.
For mortgage security investors, the advantage over foreclosure is the prospect of receiving a higher amount of money or the likelihood of posting less investment loss.
For lenders, the benefits of short sales are savings in terms of money and time spent for foreclosure proceedings and avoidance of maintenance costs or monthly fees for properties in multifamily buildings.
There are, however, analysts who are doubtful about the effectiveness of the program. Economist Thomas Lawler, for instance, contended that short sales can be easily used to carry out fraud. Lawler, a former top executive at Fannie Mae, questioned how the lenders can determine whether a homeowner is really troubled or only pretending in order to escape financial obligations.
At the start of the housing crisis, short sales were ignored by lenders, but the number of short sales worked out has started to rise, according to realtors. The number, however, is still not significant.
Fannie Mae reported that it has approved 36,968 pre-foreclosure sales in 2009, triple the number it approved in 2008.
Despite the fine-tuning of the short sale program, the major mortgage banks are still largely hesitant about approving short sales to stop home foreclosures. Besides, there are second mortgage holders and mortgage investors that they need to confer with before approving short sales.