But short sales are notoriously hard to pull off because there are always hidden snags. The federal government is looking into ways to make the process easier and more enticing for all parties involved. We get these quotes from a recent NY Times article on the subject:

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser. …

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

Here are some bits from that WSJ article:

The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven’t benefited from that because they can’t—or won’t—refinance. …

Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates…

But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low.

“Traditionally, these borrowers would be aggressively refinancing,” said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse.

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years. That’s money consumers can potentially use to help spur economic recovery.

The Home Affordable Refinance Program was set to expire in June, but so far it has reached fewer than 200,000 of the up to 5 million borrowers federal regulators hoped it would help.

Market conditions have not changed significantly since the program was launched last year, Edward DeMarco, acting director of the Federal Housing Finance Agency, said in a statement. So to give lenders more time to implement the plan and to “support and promote market stability,” the initiative will be extended to June 2011, he said.

Here are some bits from the piece as well:

Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.

And do the math. Even if you hope the real estate market is near the bottom—it’s possible, but by no means certain—it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.

Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.

People who are underwater on their mortgage normally can’t refinance to a better rate. The main exception to this is people with FHA loans can streamline those loans down to better rates.

Despite signs that the real estate market might be lurching forward, prices are expected to fall further this year and next.

The average home price in the United States will fall by about 6% by September 2011, according to a joint report between Fiserv and Moody’s Economy.com. And that’s after plunging more than 27% in the past three years.

Most of the projected home price decline will occur during the usually slow summer months of 2010. After that, prices should begin to stabilize, according to Fiserv, and stay almost flat through fall of 2011.

The main reason for continued decline, according to Mark Zandi, economist and co-founder of Economy.com, is foreclosures — the same thing that’s plagued markets for the past three years.

“Foreclosure sales will pick up this spring as mortgage servicers figure out who can qualify for a modification and who can’t,” said Zandi.

He figures there are at least 4.5 million mortgage loans either in foreclosure or clearly headed in that direction. When that additional inventory hits the market, it will provide numerous choices for buyers and encourage sellers to drop their listing prices.

The end of two federal programs, which have been propping up markets, will also tamp down prices.

The Federal Reserve has been purchasing mortgage-backed securities since early 2009, scooping up as much as $1.25 trillion worth. That has dampened rate increases by providing a ready market for the securities. But the Fed’s program lapses on March 31, when it cedes the playing field to private investors, who will almost surely demand higher rates.

Contact us in the sidebar if you think you are a good candidate to refinance.

Borrowers fell behind on mortgages at a slightly slower rate late last year, but the overall number of homeowners in financial distress remained at record levels, according to industry data released Friday.

A survey by the Mortgage Bankers Association found a surprising decline in the number of borrowers who had missed just one mortgage payment, the initial stage of delinquency. Mortgage holders who were 30 days delinquent fell to 3.6 percent of all borrowers in the fourth quarter, down from 3.8 percent in the third quarter and 3.85 percent in the corresponding period in 2008. This was the first quarter-over-quarter decline in that category since 2004.

The improvement was remarkable because delinquencies usually rise during the last three months of the year as homeowners divert cash to cover higher heating bills and holiday expenses, said Jay Brinkmann, chief economist for the industry group. If seasonal patterns hold, the rate at which loans go bad will decline again during the first quarter, he said.

The data are a sign that the end of the foreclosure crisis may be in sight, Brinkmann said. “It also gives us growing confidence the size of the problem now is about as bad as it will get,” he said.

Mortgage insurer PMI Group Inc reported a much wider-than-expected quarterly loss, as its U.S. unit continued to post disappointing results, sending its shares down 5 percent before the bell.

The company posted a loss of $228.2 million, or $2.76 a share from continuing operations for the latest fourth quarter, compared with a loss of $181.0 million, or $2.22 a share, a year back.

From the perspective of consumers the problem is that these sorts of things ultimately make it harder to get approved for refinances or other home loans.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show.

Although the FHA’s default rate has been climbing for months and eating into the agency’s cash, the latest figures show that the FHA’s woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

Facing mounting criticism about the effectiveness of the government’s foreclosure-prevention efforts, the Obama administration announced Thursday that it will tighten the documentation requirements for borrowers applying for its marquee mortgage relief program.

Starting June 1, borrowers must prove they qualify for the mortgage help upfront, providing two pay stubs and other paperwork before their payments can be lowered. The change attempts to prevent a repeat of the current backlog of borrowers who received mortgage relief after a phone conversation with their lender but did not satisfy the government’s documentation requirements within three months.

…

While lenders blamed borrowers for not submitting their documentation on time, homeowners and housing counselors have complained that banks often lost the paperwork. In some cases, lenders have been slow to complete the loan modification even after the borrower met all the requirements, they have said. Government officials said the new paperwork requirements will be easier to understand and less onerous for borrowers.