Obama Officials Offer Plan To Help Underwater Homeowners : Planet Money A government program will pay homeowners and banks for agreeing to short sales.

Obama Officials Offer Plan To Help Underwater Homeowners

Here's a post-bubble indicator: 11.3 million U.S. homes are underwater -- the value of the home is less than what's owed to bank.

In some cases, the least bad option for both banks and homeowners is a short sale. The owner sells the house for whatever the market will bear, and the bank agrees to take less than it's owed on the mortgage. Short sales can sometimes be a preferable alternative to foreclosure, because they can be less costly for the bank and do less damage to the seller's credit.

To that end, a government program that starts next month will actually pay certain homeowners and banks to work out short sales.

(The bank gets $1,000, the homeowner gets $1,500.)

The program is described in this explainer from the government, and in this story from today's Times.

One complicating factor: Many people who are underwater have second mortgages on their homes. And even if the bank that made the first mortgage agrees to allow a short sale and take a loss, the bank that made the second mortgage may not agree.

As it turns out, the government is also pushing the banks that hold second mortgages to be more flexible. Barney Frank recently sent a letter to the banks, calling on them to write down the value of the loans. That could remove another obstacle to more short sales, this morning's WSJ says.