In mid May various news outlets reported that "Making Home Affordable" would add short sale guidelines to the rules for mortgage modifications. At this point we have over 600,000 trial mortgage modifications with very few becoming permanent. Encouraging short sales appears to be the best way for many distressed homeowners to avoid foreclosure.

This Wall St Journal article discusses final short sale guidelines that reportedly have been issued.

According to the article, people who apply but do not qualify for a permanent loan modification will receive up to $1500 for completing a short sale, while loan servicers will receive $1000. Also investors holding first mortgages will receive $1000 for allowing payment of $3000 to second mortgage holders as payment to release their lien. Borrowers who complete the program must be fully released from future liability for the debt.

This is good news for the short sale market.

It's no secret that the government's Making Home Affordable program has not had much impact on alleviating the number of homeowners facing foreclosure or underwater in their mortgages. This article in the NY Times details some new efforts by the government to push lenders to reduce more loan payments. The main problem even for homeowners who have received loan modifications is that although their payment has been reduced, their loan balance has not been reduced so they still owe more than their homes are worth.

The Blog Calculated Risk posted information released today by the Mortgage Banker's Association showing that the total number of loans either delinquent or in foreclosure rose to a new record at the end of the third quarter. More than 10% of all outstanding prime loans and more than 40% of all subprime loans are distressed. Overall 14.4% of all mortgages are behind in payments 30 days or more. Here are more details from the post:

On the MBA conference call concerning the "Q3 2009 National Delinquency Survey", MBA Chief Economist Jay Brinkmann said this morning:

The problem is moving to prime loans, including fixed rate prime loans, and also FHA loans. "We are seeing the first hit on the weaker prime fixed borrowers."

Remember the delinquency rate includes loans in modification (something to remember - especially for the 90 day delinquent loans).

MBA expects unemployment rate to peak in Q1 or Q2 2010, and delinquencies to peak sometime after the unemployment rate peaks.

Brinkmann expects foreclosures to possibly peak in 2011 (last quarter he said late 2010). He changed the forecast for two reasons: he expects unemployment to stay fairly high, and he thinks the prime borrowers will hang on before defaulting, and all the foreclosure moratoria will delay foreclosures - a longer trailing effect than usual.

A recent article on the web site Propublica explains why some securitized mortgages (those privately securitized by banks, which was typical for many subprime and jumbo loans) are being disproportionately denied loan modifications. They produced this graphic to illustrate why investors in different tranches of the security have conflicting motives to approve or disapprove a request for loan modification.