An important thing to keep in mind when considering a short sale to avoid foreclosure- your lender is not technically obligated to sell your house in such a manner. For them, it is a pure cost-benefits calculation. When they allow a real estate short sale, they have to swallow the discrepancy between the amount you owe on your mortgage and the money your house brings in when it sells. They don’t like doing this unless the alternative is even less profitable.

You may even have a potential buyer who has put down all the paperwork to make an offer, and they still won’t cave. On the plus side, this can go two ways- the bank may say you have to go into forclosure, but they may also try to convince you to stay in your house and refinance your mortgage.

You may even be able to settle it with a loan modification.

If that doesn’t work, though, and your bank is willing, a short sale may be completed. In order to comfort potential buyers, you may want to think about moving out of your house while going through the shortsale process- this will make it seem less likely that you may decide to simply refinance. And be sure to get official approval from your bank. “Bank Approved Short Sale” is much more likely to get takers than one that doesn’t yet have expresss permission. a

The Treasury Department unveiled sweeping rules this week to help financially troubled homeowners who need to sell but can’t get a price high enough to pay off their mortgages. Homeowners will even get $1,500 to help cover their moving costs.

The plan is designed to help homeowners who don’t have the income or debt levels to qualify for a loan modification under the Obama administration’s $75 billion Making Home Affordable program. The plan establishes timelines, a standard process and documents, and cash incentives for participation.

Short sales, as these deals are known, reduce the damage to the borrowers’ credit record and save the lenders the cost of foreclosure. Short sales also help neighboring property values because the sales price is usually higher than what the house would fetch in a foreclosure auction.

About one in 10 home sales this year was a short sale, or an estimated 500,000 sales, according to the National Association of Realtors. In areas like Las Vegas, southern Florida and California, the ratio is far higher.

Recently, the U.S. Department of Housing and Urban Development (HUD) has passed new guidelines allowing FHA borrowers to seek to cut down their monthly payments on their mortgage through a Making Home Affordable loan modification program starting August 15^th.

Before this, homeowners struggling to make their payments on an FHA-backed mortgage were not allowed to get a loan modification.

Now, at-risk mortgagors will be able to lower the principle they must pay on their loans by up to 30% in what is being called a ‘partial claim’. However much the principal is reduced will be combined into a second, no-interest mortgage that isn’t due until the first one is completed, or the property no longer belongs to the borrower.

Reducing the principal on the original mortgage in this way will allow homeowners to lower their monthly mortgage payments to an amount they can afford, preventing foreclosures and defaults. The old MHA loan modification program used to leave the principle alone, reducing only the interest rate.

The goal of either method, however, is to reduce monthly mortgage expenses for homeowners to 31% of their income.

An added bonus of the new MHA program is its ability to bring borrowers up-to-date on their payments: it includes all past due payment into the second, no-interest mortgage.

The program is called FHA Home Affordable Modification, and in order to qualify, a borrower must already be in default on their mortgage, (that is, at least one month past due on payments) but not more than one year past due.  This, hopefully, will prevent those who are irresponsible and completely unable to make payments from joining, and also preventing those who can make their payments just fine from taking advantage of the program.

In addition, any borrower wishing to take advantage of the program must be the owner and occupant of a single-family residence, and be able to prove that they have enough financial resources to maintain payments on the new mortgage. They must also not have purposefully defaulted on their mortgage payments even though they had enough money to pay. Also, applicants must not have more than 55% of their monthly income in total debt after modification.

The new program doesn’t only incentivize the mortgage owners, but lenders as well. It offers up to $1,200 for each loan to lenders. Homeowners who do not have an FHA mortgage should try to get a loan modification through the first Making Home Affordable loan modification programs which deal mainly with changes of interest rates.

For more information on the FHA-Home Affordable Refinance Program can be found on the HUD website.

We talk a lot about loss mitigation here, but it seems we never give a full, descriptive definition. This is the gist of what the HUD (Department of Housing and Urban Development) says counts as loss mitigation:

Loss mitigation is a service provided by a third party with the goal of helping a mortgage-possessing homeowner lessen the amount of money they lose if they can no longer make their mortgage payments. Usually, it is a division within a lending bank, though it can also be a private financial firm. The process by which these experts try to help decrease the amount of money lost by the bank and the homeowner is to facilitate negotiation between the two parties. Usually they do their best to avoid outright foreclosure.

New terms are often reached through either loan modification, short refinance negotiation, real estate short sales, a deed-in-lieu of foreclosure, or some other form of loan work-out.

These types of services use to be relatively uncommon and reserved for special cases. Nut ever since the 2008 recession hit, more and more homeowners have been turning to loss mitigation tactics to try to deal with financial burden. Unfortunately, this places a big strain on banks, who are unused to having customers feel they are entitled to this service and are struggling to grow their departments.

That’s where outside firms step in and fill the gap- to try to benefit both the overwhelmed bank and the overworked homeowner.

Just as recently as five years ago, real estate short sales were fairly uncommon, and before that, they were extremely rare. However, in the current economic climate of high unemployment and lots of mortgage default, many more homeowners are turning to short sales to compensate for the fact that home values are falling.

According to a recent study conducted in California, almost twelve percent of all sales in the real estate business were short sales in the past few months.

This sudden onslaught of popularity of the this maneuver has left bankers at a loss- short staffed and undertrained, they are trying to keep up their service people numbers to contend with all of the new loan modification requests and short sale dealings, each of which is very time consuming and labor-intensive to execute.

There is a very sharp learning curve for both mortgagers and mortgagees, as well as loss mitigation specialists and other intermediaries. Banks are striving to close the short-sale close gap, making sure that a higher percentage of houses that go on short sale actually get purchased. Though home sales are on the decline in general.

Banks in today’s market are made to deal with higher demand for mortgages and mortgage/loan services, including but not limited to refinancing and loan modifications, than ever before. The backlog at lending and banking companies is starting to effect everyone’s ability to access loss mitigation services.

In areas where unemployment is booming, mortgage delinquencies and foreclosures are also on the rise, and even those who manage to successfully secure loan modifications could be in trouble again in home balues continue to fall, or incomes continue to drop.

Lenders are doing their best to expand their loss mitigation services as requests skyrocket, but officials in the industry have commented that the delays are greatly hindering everyone’s efforts to revive the housing market. Loan modification programs are suffering, and short sales are taking way longer than they should. Banks were not prepared for this.

Senators have written to the Secretary of Housing and Urban Development, Shaun Donovan to help formulate a new strategy to help and coerce lenders to help homeowners quicker and more often. Even HUD-approved counselors are having a hard time getting homeowners access to loss mitigation departments.

It takes a very savvy counselor or professional to get banks’ attention and expedite the process. California loan modifications especially are on the rocks.

The law passed in July of last year forcing lending institutions in California to accept most loan modifications within certain parameters is now helping homeowners avoid foreclosure situations.

California Loan Modification Code (Civil Code 2923.6) took effect last year, and has since been applied to all residential loans from January 2003 to 2007 that are secured by residential mortgages and are the primary home of the owner. The code broadens and extends the Pooling and Service agreements that all residential mortgages have, including a duty to optimize present net value to investors and related parties, to requiring lending servicers to agree to loan modifications.

Basically, homeowners in the State of California have added a new weapon to their arsenal to guard against foreclosure and default, thanks to the California government.  Lenders are literally contractually bound to provide loan mods, which is a total turnaround from standard practice just a few years before, when loan modifications and real estate short sales were relatively uncommon. Now, it seems foreclosure is the absolute last resort, not the norm.

Failure on the part of a lending institution to comply with the Civil Code then allows borrowers to sue for wrongful foreclosure or specific performance problems in any State Court.

Mortgage bankers are in a tight spot- with more and more people demning loan modifications and going into foreclosure, they’re being stretched thin. Borrowers are distressed, they say, and they’re finding more and more defaults.

The Obama administration’s attempts to aid homeowners, including the housing affordability program, are providing some modicum of relief but not enough to take care of the myriad of problems the industry is facing.

The current loan modification programs (recently enacted) are having a positive impace of keeping down foreclosure rates and short sales, the issues are more far-reaching. Many people have lost their jobs and have no hope of a loan mod restructuring that will save their home, or homes are being vacated, or fraud is becoming involved.

Hard hit areas, like California loan modification institutions especially, are experiencing troubling drops in the prices of homes, so those hwo are having trouble have even less equity than they did before.

Even interest rate reductions and borrower bonuses aren’t doing the trick. The Obama plan is a measure to try to make it through the recession and falling housing market, not to solce the entire problem. Hopefully, things will start looking up again soon. But as long as foreclosures continue to rise so sharply and real estate prices go through the floor, there won’t be much anyone can do to stem the flow.

The main thing to try to hold on to some hope- if everyone panics at once, the situation will only get worse.

If you’re planning to avoid foreclosure with a strategic short sale, you may be wondering how much time it will take. Lending institutions have been known to drop the ball with short sale approvals, so you want to know how much time is normal and how much is too much.

Shortsale clients need to realize that the time it take depends on the lender as well as the situation- some lenders actually outsource their shortsale negotiations to someone else, which adds to the delay.

You should really make sure that your package is complete, and your files are perfectly filled out. If you’ve done that, approval should take no more than sixty days, though up to four months is not unheard of.

The actual process of the short sale itself takes longer, wherein sixty days is more of a minimum than a maximum. It depends on how many shortsales, foreclosures, and loan modifications the lending institution is dealing with. The bank should at least acknowledge the receipt in ten to thirty days. They’ll order an appraisal within the next month or two after that, and review your file in about as much time. A negotiator will then be assigned to the sale, and he or she will take about thirty or sixty days to decide whether or not the file is approved or rejected.

Because unemployment and layoffs are becoming more and more widespread, up to almost 9.4%, Americans in greater numbers than ever are falling behind on their mortgage payments. This is simultaneously triggering a big wave of foreclosures and real estate short sales that some say might delay the economic recovery of the nation.

Thursday, a recent mortgage trade study showed that 14% of mortgage holders in the country were delinquent on their payments, or in the pre-foreclosure process during the second quarter of the year. This wave of foreclosures is now affecting unemployed homeowners who have high credit scores, good financial histories, and traditional, simple home loans.

High-quality borrowers are apparently struggling in this new economy that hold 6.7 million fewer jobs and one in three foreclosures from prime, fixed-rate loans. This could swamp the previously thought to be improving home sales and increase in manufacturing to drag down the economy.

This will prove to be a big challenge for the put-upon Obama administration, which is now getting on bank’s backs to do more loan modifications and restructurings to keep borrowers in their homes as much as possible. But the banks are facing a messy backlog of problem loans, and suddenly loan mods are becoming more and more difficult to negotiate.

Under the new Obama plan, mortgage bankers say homeowners are getting some relief, but it’s not enough.