On April 5th, the struggling housing market will face a new ally in the form of a short sale program being aggressively pushed by the Obama Administration to help millions of home owners escape from mortgage debt by selling their homes for less than the balance of the mortgage while receiving an additional monetary payment to do so. As the government’s attempts to assist homeowners struggling to make their mortgage payments have only slightly helped according to a recent article in the New York Times, the new program will pay $1,500 to the short selling homeowners to "relocate."
The benefits of the plan are hoped to be widespread, as lenders will ideally receive more money than with a foreclosure, the borrowers will experience a softer hit to their credit – including the lender’s assurance that they will not later be sued for an unpaid mortgage balance – and fewer homes will be empty on the foreclosure market. To protect from cases of fraud, lenders will utilize real estate agents, who will determine a home’s value and, by correlation, the minimum acceptable sale price. Adding another layer to this new system, the agent’s determined value will not even be shared with the home owner, but the lender is required to accept any offer equal to or higher to such value. What happens when a home owner has multiple mortgages on a single property, however, remains unclear.
From a family law standpoint, this plan provides the sort of good news that divorcing spouses struggling with what to do with their "under water" marital residence are looking for. Whether it actually fulfills that glimmer of promise, however, remains unclear. In the down real estate market, how to equitably distribute the home has proven challenging. Oftentimes, neither party can afford to continue residing in the marital home, refinancing is unavailable due to the negative equity, neither party wants to face the credit hit of a foreclosure, and there is no money to cover the shortfall debt that might result where the house is sold for a price lower than the outstanding mortgage.
Short sales with a guarantee that the lender will not come after the borrowers such as that in the President’s plan are therefore a desirable way out. Short sales generally tend to be a risky, slow moving process with no guarantees. With the Obama Administration’s new plan to boost the housing market, hopefully such situations will take a turn for the better.