The administration is urging participating servicers to follow through with short sales as an alternative to foreclosure for those homeowners that don’t qualify for a reworked mortgage under the Home Affordable Modification Program (HAMP).

To entice servicers to accept a sale on defaulted properties for less than the outstanding mortgage balance, Treasury is offering incentive payments of $1,000 per completed short sale. Servicers will also receive $1,000 for each deed-in-lieu of foreclosure.

Subordinate lien holders will be paid to release their claims on defaulted properties, up to $3,000 of the short sale proceeds as long as the primary investor agrees to share the earnings, and for this concession, the investor will also receive up to $1,000 from the Treasury. For those second lien holders who want more than the $3,000 cap to relinquish their stakes, the Treasury said they can pursue a short sale outside of the federal program.

Homeowners who agree to a short sale or deed-in-lieu of foreclosure will get up to $1,500 to help with relocation, and must be “fully released” from any future liability, according to the guidelines.

The Home Affordable Foreclosure Alternatives Program (HAFA), as it is being called by the Treasury, was initially announced back in May, but was delayed because of concerns over legalities involved in the process and the rights of second lien holders to hold claim over the property. DSNews.com reported in October that the administration was readying guidelines for the program, and yesterday, they arrived.

In addition to solidifying incentive payments, the newly published procedures bar servicers from forcing short sale facilitating agents and brokerages to reduce their commissions as a prerequisite for approving the transaction.

Under the terms of the program, once a servicer determines a homeowner does not qualify for a modification, the servicer has a 30-day window in which the borrower must be considered for the HFHA program. Each participating servicer is required to develop a written policy, consistent with investor guidelines, that describes the basis on which the servicer will offer the HAFA program to borrowers.

Every potentially eligible borrower must be considered for HAFA before the borrower’s loan is referred to foreclosure or the servicer allows a pending foreclosure to sale to go through.

The servicer must assess the current value of the property, independent of the borrower and any other parties to the transaction. No payment for the valuation can be assessed in advance of the sale.

Borrowers who qualify for HAFA will be given pre-approved short sale terms before the property is listed, and once an offer is made, mortgage servicers have 10 days to approve or reject the sale.

The HAFA program becomes effective April 5, 2010, but the Treasury said participating servicers may elect to implement the program earlier.