On May 14th an additional program of the evolving $75 billion dollar plan ‘Making Home Affordable‘, was announcement by the Obama administration. The intention of this program is to alleviate the national housing crisis by funding losses to creditors during transactions where short sales and deed-in-lieu contracts are necessary.

Short sales occur when the seller’s creditor agrees to sell the home at a value that is lower than the sum of the home loan and the sales costs. In the process the seller’s debt is released to the lender. When there are no buyers to make a short sale possible a lender may accept a deed-in-lieu, where the ownership of the property is transferred to the loan servicer. Both situations only occur in dire circumstances where the only other option would be to foreclose the property.

The compensation given to the servicers in both situations would be up to $1,000, with an additional $1,500 dollars paid to the borrowers for relocation expenses. A time limited to 90 days will be given to borrowers to achieve a short sale, with an extension of up to a year in areas with severe market downturn. If no sale is made the property will be signed over to a deed-in-lieu.

Various safeguards were installed in the administration’s proposal such as a $10 billion dollar insurance program aimed to protect lenders from home-price declines. In addition, to prevent exploitation of the program through the unloading of homes, borrowers must first be deemed unable to get loan modifications. It was also proposed that the homeowner agree to provide the bank with equity reparations once prices start going up again.

The initiative was pleasantly received by many experts as a step forward for market stimulation. As President Obama said, “…everyone is better off, including the community, if people stay in their homes”.