Financial Assistance for Underwater Home Owners Underwater homes continue to be a problem for both homeowners and banks. From the homeowner’s perspective, as long as the residents plan on staying in the house it is possible to maintain the mortgage status quo. Though the homeowner is making payments on an overvalued mortgage, as long as payments are made there are no immediate problems to address.
From the banks perspective the situation is similar. As long as the homeowner continues to make payments the bank is satisfied.
The problems begin when the homeowner tries to sell the home. An underwater home is one where the mortgage balance is higher than the value of the house. When housing prices fell over the last 2 years, millions of homeowners found themselves living in underwater homes. Selling these homes is very difficult because the difference between the overvalued portion of the mortgage must be paid off somehow. Some homeowners found themselves with homes that have lost as much as a third to one-half of their value depending on the location. A buyer can only obtain a mortgage for up to 80% of the market value of the home.
Mortgage companies are not anxious to write-off even portions of mortgages, and this has created an extremely frustrating process for homeowners. Now the Obama administration has decided to assist those homeowners living in underwater homes who are unable to qualify for the mortgage modification program and are being forced to move.
Under the new plan, the Obama administration is offering $3,000 in moving expenses to those homeowners who manage to sell their homes on a short sale or who simply return the property to the mortgage company. A short sale is a house sale where the lender agrees to take less for than the mortgage payoff than is currently due. In other words, the value loss is written off.
A short sale will still impact consumer credit scores, but not nearly as severely as a foreclosure. A short sale also does not affect the credit score for as long a period as a foreclosure.
Mortgage companies prefer short sales over foreclosures. For one thing there are fewer fees associated with a short sale as opposed to a foreclosure. The bank also does not have to take the house back and assume responsibility for its upkeep.
Estimates are that as many as 350,000 homeowners will take advantage of the new program. The program is expected to last through 2012 which gives an indication of how long it is expected to take to clear the housing market of underwater homes.
The new Obama administration also added a stipulation to the program on the lender side. Mortgage companies must decide how much they will accept for the home, and if a bid comes in equal or higher than the minimum, the lender must accept the offer. This will significantly speed up the short sale process.
Hopefully this new program will perform better than the
home loan modification program. That modification program has been a disappointment with only a fraction of the expected number of homeowners successfully obtaining a permanent mortgage revision.