The Treasury Department plans to announce financial incentives for servicers to pursue short sales and deeds in lieu of foreclosure for troubled homeowners who do not qualify for the Obama administration's loan-modification program.

In a short sale, a home is sold for less than is owed on the mortgage, whose holder accepts a discounted payoff. It is often considered less costly than a foreclosure.

Under the Treasury plan, which is expected to be announced this month, servicers would get a $1,000 "success fee" when a short sale is completed, according to short sale experts who have been briefed on the policy. The home seller would receive up to $1,500 to assist with relocation expenses, similar to the "cash for keys" programs that various servicers offer.

Treasury officials are working with an advisory committee to determine how to accommodate the holders of second liens, which have been a big hurdle to completing short sales. Much of the debate around short sales is centered on whether the holders of second liens will receive a fixed amount or a percentage of the short sale price.

"Second liens have been a considerable problem for short sales," said Matt McCabe, the president of Loan Resolution Corp., a Scottsdale, Ariz., company that helps lenders work out defaulted mortgages.

Currently there is no uniform policy for banks to accept a payoff for a second lien in order to complete a short sale, McCabe said.

Many of the largest banking companies have adopted their own internal policies, which vary. For example, in March, Bank of America Corp. adopted a new policy requiring that 5% of the short sale proceeds go to pay the second lien in situations where there is no equity available, particularly for standalone home equity lines of credit. (B of A's old policy required that 10% of the balance of the home equity loan be paid.)

A Treasury spokeswoman, Meg Reilly, confirmed Thursday that a directive on short sales will be issued this month but she declined to provide details.

In April, Treasury said it planned to offer incentives for short sales the following month, but the policy has taken took longer to implement. 

To view the online article, please click here.