The use of short sales as a foreclosure avoidance tool may get a boost now that the Treasury has issued guidelines to streamline the process which can be frustrating for sellers and homebuyers alike.

The new guidance is designed to expedite short sales and deed-in-lieu transactions for struggling borrowers that cannot qualify for a permanent loan modification under the government’s Home Affordable Modification Program.

Servicers can offer borrowers these options if they do not qualify for a HAMP trial or have missed two consecutive payments.

In a deed-in-lieu transaction, a homeowner simply hands over the keys to the servicer, vacates the property and walks away debt free.

In a short sale, the distressed borrower sells the property (for less than the outstanding mortgage) and walks away debt free — as long as the mortgage holder approves the transaction. The servicer/investor can generally recoup 20% more on a short sale than a foreclosure sale, thus avoiding the cost of the time-consuming foreclosure process.

The guidance establishes procedures for HAMP servicers to provide borrowers with a pre-approved price and sale terms prior to listing the property.

Once the borrower submits a signed sales contract and all required attachments, including the status of subordinated liens, the servicer has 10 days to approve the sale.

The success of short sales really depends on the time it takes to consummate a sale. Buyers get frustrated and give up if the banks or investors don’t respond to offers in a reasonable time.

The new guidance integrates short sales into the HAMP program and draws on best practices, according to Joe McCloskey, a senior advisor to HomeTelos, a Dallas real estate services firm. “It is very good, well-crafted program by Treasury that helps to address a lot of the stumbling blocks that have prevented short sales from becoming a true loss mitigation tool, as opposed to a one-off solution,” he said. HomeTelos specializes in short sales.

Treasury also is making a “very effective use of incentives,” Mr. McCloskey said. HAMP servicers will receive a $1,000 incentive payment for each completed short sale and deed-in-lieu transaction. The former homeowner will receive $1,500 for relocation costs. Investors can receive up to $1,000 if they pay $3,000 to subordinated-lien holders that relinquish their claims. The investor’s reimbursement is based on a one-for-three match.

The incentives may not seem like a lot, Mr. McCloskey said, but some cash has to cross the table to successfully negotiate with second-lien holders. “The ability to recoup something is very attractive,” he added.