Foreclosure
New Treasury Program to Encourage Short Sales
March 8, 2010 by Ryan&Schwarz/LLP · Leave a Comment
Up to now, the Obama administration has had a pretty clear goal of doing whatever it could to keep struggling homeowners in their houses. Today, however, the New York Times reports that a new Treasury program will seek to do the opposite: it would encourage underwater borrowers to leave their homes more quickly. Is the Obama administration changing course?
The new proposal relies on short sales. That’s where there’s a buyer willing to buy a house with an underwater mortgage — but for less than the borrower’s outstanding balance. As you can probably imagine, most of the struggling homeowners can’t afford to make up that difference, so the bank generally has to agree to stomach some or all of the loss.
Short sale is often a sensible option for the bank. If the borrower were to foreclose anyway, then additional legal and administrative costs would be incurred. The bank would have to put the home on auction and eventually sell it. If the short sale offer is in the ballpark of what the bank believes it would get at the auction anyway, then it might as well consent. In such cases, the bank is better off short selling than foreclosing.
