Treasury Provides Details of New Short Sale Incentive Program

Less then a month after the announcement that the federal government was going to start an incentive program to encourage buyers and banks to sell houses at depressed values without foreclosures, David Streitfeld of The New York Times has the details — and they’re a little strange.

The basis of the program, which starts April 5, is much as it was described in February: The bank servicing the mortgage will get $1,000 for a short sale if it agrees not to go after the homeowner for the remainder of the mortgage; another $1,000 goes to the servicer of a second mortgage, if there is one; and the homeowner gets $1,500 in “relocation expenses.” If there’s a third mortgage, that bank gets nothing, but can still hold up the short sale.

The big supposed benefit is that short sale homes won’t be listed as foreclosures per se, so communities think they won’t be ransacked by former owners or vandals. Since if the bank took possession of the home and then short sold it, the bank would be listed as the seller of record in all legal documents, homeowners will seemingly keep possession of the homes, but they may or may not continue to occupy them.

The really strange thing is that the acceptable value of the home — which is expected to be less than the value of the mortgage but, with many short sales, may be less than the supposed market value of the home — will be determined by the bank in concert with a licensed real estate agent and not shared with the owner. Banks that agree to the program must agree to take any offer that is equal to or lesser than the value as determined by the real estate agent. What’s so strange about that is that normally banks determine the value of a home they are about to mortgage with the help of an appraiser, not an agent. At the height of the real estate crisis, appraisers were the people who verified to banks that the houses were worth at least as much as the mortgages, and during the crisis, those determined values often meant that people had homes worth less than the value of the mortgage.

On the other hand, the National Association of Realtors is a lobbying powerhouse and, in the case of a foreclosure, their army of Realtors may make no money at all. In a short sale, if everyone plays along, a Realtor will earn an appraisal fee from the bank in addition to the standard 6 percent fee he or she collects from a buyer. Unless the home sells for $25,000, the Realtor involved in the short sale stands to make more than the seller and, if the home is worth more $75,000, more than all the parties combined. It sounds like someone else might be getting a nice little bailout, too.