In the last blog, the short sale process and its related challenges were explained. The federal Foreclosure Alternative Program is scheduled to go into effect on April 5, 2010 and promises to streamline the process for everyone involved in a short sale transaction. There are several key aspects to this program which will be outlined here.

Home Owner Eligibility: Home owners will be eligible for the Foreclosure Alternative Program if they meet the minimum eligibility criteria for a Home Affordable Modification but did not qualify for a modification or were unable to sustain payments under a trial period plan or a modification. Prior to deciding on foreclosure, participating lenders must evaluate each eligible borrower to determine if a short sale is appropriate. Considerations include property condition and value, average marketing time in the community where the property is located, the condition of the title, and a determination that the net sales proceeds are expected to exceed what the lender would make through foreclosure Incentive Payments outlined below.

• Lenders may receive incentive compensation of up to $1,000 for successful completion of a short sale or DIL.

• Borrowers may receive incentive compensation of up to $1,500 to assist with relocation expenses.

• Treasury will also share the cost of paying junior lien holders to release their claims, matching $1 for every $2 paid by the investors, up to a total contribution of $1,000 by Treasury.

Standardized Documentation: The program will publish streamlined and standardized documentation, including a Short Sale Agreement and an Offer Acceptance Letter. These documents will outline specific marketing terms, describe the rights and responsibilities of all parties and establish clear timeframes for performance. Creating one standard set of documents that the industry can use is expected to minimize the complexity of these transactions and significantly increase successful close of short sales.

Property Valuation: The lender will independently establish both property value and the minimum acceptable net return in accordance with investor guidance and will provide instruction to the borrower regarding the list price and any permissible price reductions. The price may be determined based on either: (1) an appraisal performed in accordance with USPAP and/or (2) one or more Broker Price Opinions either of which must be dated within 120 days of the Short Sale Agreement.

Minimum and Maximum Duration: Under the program, lenders will allow borrowers at least 90 days to market and sell the property, with possibly more time based on local market conditions. The property must be listed with a licensed Realtor experienced in selling properties in the neighborhood. Marketing of the property may run concurrently with the foreclosure process, however no foreclosure sale can take place during the marketing period as long as the borrower is acting in good faith to sell the property. There will be a maximum marketing period of 1 year for the property to ensure diligence by lenders and borrowers in moving as quickly as possible to complete the short sale and deed-in-lieu of foreclosure process.

Fees and Charges: Lenders may not charge borrowers fees for participation in the Foreclosure Alternative Program.

Property Eligibility: Any junior liens, mortgages or other debts against the property must be cleared for the property to be sold as a short sale or deeded to the lender. The lender can proceed with a short sale or deed-in-lieu if there is a reasonable belief that all liens on the property can be cleared.

Program Expiration: Eligible borrowers will be accepted until December 31, 2012. Program payments will be made upon successful completion of a short sale or deed-in-lieu of foreclosure.

Deed-in-Lieu of Foreclosure: At the lender’s option, the Short Sale Agreement may include a condition that the borrower agrees to deed the property to the lender in exchange for a release from the debt if the property does not sell within the time specified in the Agreement. In this case the borrower would have 30 days to vacate the property and would be entitled to $1,500 to assist with relocation expenses, in addition to any other funds the lender may provide to the borrower.