Short Sales Get Even Shorter - Again, For Fannie Mae and Freddie Mac Servicers, That Is

With the Home Affordable Foreclosure Alternatives (HAFA) short sale program set to expire at year's end, we are seeing a new set of rules emerge for short sales on properties with loans backed by GSEs Fannie Mae and Freddie Mac. The FHFA has worked with the GSE's to overhaul short sale guidelines and regulations, with the intention to accomplish these major goals:

• To better streamline short sales, and  generally speed up the short sale approval process. This has been challenging because short sales often require the coordination of multiple stakeholders.
• To give the servicers who handle GSE loans more delegated authority and mobility, which will enable them to make decisions on short sales faster.
• To ensure that short sales offers are properly valuated.
• To set measures in place to prevent short sale fraud (flipping, and “flopping”).

New Sheriff for GSE Short Sales: The Servicer

The new guidelines for short sales on GSE loans went into effect on November 1^st, and in many ways the ‘new sheriff in town’ is servicers, in that much of the new short sale guidelines apply to GSE servicers, and delegate authority to the servicers to approve standard short sales for borrowers and properties which fall into the FHFA standards for eligibility. The FHFA has, in effect given servicers a set of parameters against which to evaluate short sales, and the authority to approve those that qualify faster.

These measures also increase transparency for servicers, borrowers, buyers, and even junior lien holders by presenting clearly defined parameters of not only what Fannie and Freddie will accept in terms of short sale, but also by placing caps on amounts paid to junior lienholders, increased regulation of agent/broker fees, and even setting regulations for how soon a property can be resold following a successful short sale and how much.

Eligibility for an acceptable short sale is designated according to a few factors. Here are the broad strokes:

1. Property types eligible for short sale are residential, investment and second home.
2. All borrowers who meet FHFA hardship criteria are basically eligible for short sale. Criteria that qualify a borrower include factors like divorce, death of a primary on the mortgage, etc. Because short sales are intended to be sort of  last resort, and because the FHFA’s ultimate goal is to attempt to keep people in their homes, there are a special set of additional requirements for borrowers who are current or less than 31 days delinquent on their mortgage.
3. All short sales must be proven to be arm’s length transactions to be eligible for approval.
4. The GSE’s set a minimum net for proceeds on each short sale that must be met for the short sale to be approved by the servicer.
5. Fannie and Freddie now require servicers to obtain broker’s price opinions (BPO’s) early in the short sale process, as part of an effort to provide listing price guidance that makes valuation clear and transparent to everyone from step 1. The GSE will use the BPO to determine the fair market value of the home, then provide that information to the borrower, realtor, etc. However this is only guidance, at the end of the day the seller and their agent should decide on the most prudent listing price that meets the minimum net proceeds requirement.

Servicers Given Options for Short Sales Outside Parameters As Well

And if a proposed short sale does not meet the GSE’s eligibility requirements as set, servicers that believe it may still prove worthwhile can present the particular case to Fannie and Freddie for evaluation, on which the GSEs have made a commitment to surrender decisions quickly. And timelines are set at a crisp pace for servicers on eligible short sales as well:

• 3 days to acknowledge receipt of a proposed short sale.
• 30 days to remit a decision to the borrower, which can be extended to 60 days with proper cause. However, after 30 days the servicer is required to provide weekly status updates on the short sale directly to the borrower.

More Short Sale Power, More Responsibility

Of course, with more decision making power, there is also increased responsibility. The GSEs have made a commitment to maintaining baseline quality control compliance on short sales with their servicers.  There are several checks in place to make sure that servicers not only conform to the new short sale guidelines, but also that they implement new requirements according to their intent. This is very much a “spirit of the law” as well as letter of the law deal with GSE short sales.

Fannie and Freddie have made a commitment to be more involved with servicers on the micro level by periodically looking into system notes, examining and evaluating servicers’ short sale interactions with borrowers, and closely examining cases where borrowers ‘escalate’ short sales by bringing them directly to the GSE due to difficulty working  with the servicer.

Measures to Curtail Short Sale Fraud

Besides requiring arm’s length short sales, the GSE’s also came up with guidelines that will discourage if not prevent the most common forms of short sale fraud:

• Flipping - where borrowers and buyers purposely obtain the lowest short sale offers, and engineer a back room agreement to split profits from a later, higher resale. These re-sales sometimes take place as soon a month after the short sale closes.
• Flopping - where borrowers purposely leave out the higher more appropriate offers during the short sale process.

Starting November 1^st, the GSE’s will now mandate that a short sale property not be re-sold for more than 120% of its short sale price for up to 90 days after closing. This is a smart stroke in the fight against short sale fraud, and is expected to further reinforce the GSE’s arm’s length restriction on short sales.

Fannie and Freddie’s new guidelines on short sales don’t stop there, they also set a $6,000 cap on payments to junior lien holders, and even allow for $3000 of relocation assistance to eligible borrowers, making this perhaps the most comprehensive and transparent regulatory reform we’ve seen this year. The GSE’s have of course expressed that their main goal is to try to keep people in their homes, but they also rightly perceive the need for short sales in the current market place and with these new guidelines they have taken great steps to not only streamlining short sales, but also better educating borrowers about the process and seriously increasing transparency.

Short Sales Today - More Attractive to Borrowers and Lenders

Despite the flurry of loan modifications, principal reduction offers, other “loss mitigation” tactics, and increasing support from legislation to eliminate abuses in the foreclosure system, there comes a point when these cures simply are not enough to help borrowers who absolutely cannot afford their mortgages.  These measures won’t provide long-term remedies in the event of protracted loss in income or other lifetime shocks such as divorce or medical issues, and may only serve in “kicking the can down the road” instead of solving the problem.
 
For the most part, the general pool known as “distressed borrowers” would like nothing more than to become current on their payments and keep their homes.  At some point, unfortunately, adequate resources will not help; a short sale may be the only alternative.  Borrowers who embrace this alternative sooner rather than later could avoid the prolonged stress of the foreclosure process.

At the beginning of the housing crisis, lenders and servicers resisted the concept of a short sale.  These institutions assumed they could recoup more of their losses at a foreclosure auction, or through repossessing the property and listing it themselves (known as REO).  As the housing crisis began to unfold, however, these institutions found themselves reconsidering their stance for a number of reasons including:

• Increased government support for short sales through increased incentives and more inclusive guidelines
• Improprieties in lender due process in processing foreclosures were uncovered and became costly to litigate
• More laws were enacted at state and federal levels penalizing lenders for unscrupulous foreclosure activity and lack of maintenance on foreclosed properties
• The time it took to foreclose on properties and evict borrowers lengthened
• As property values fell, so did the value of REO and lenders’ hopes for recouping  losses through listing repossessed properties began to fade
• A new class of all-cash buyer emerged, creating a market for short sale transactions

Short sales today are a more attractive and lucrative option for borrowers thanks to full-blown lender support of the process.  Simply put, lenders lose less on short sale transactions compared to foreclosure or REO sales, even inclusive of lender incentives up to $35,000 in some cases for the borrower to short sale the property. 

As an interesting development, the by-product of recent regulatory and legislative activity has provided short sales with the real boost it needed to bring it to a tipping point of lender acceptance.  The $25 billion settlement between major lenders and individual states provided the most influential push.  Lenders included in the settlement were mandated to earmark approximately $17 billion in “homeowner relief,” with the lion’s share of that amount going toward short sales.  And, more recent developments in streamlining short sale guidelines require decisions to be made on short sale offers in 60 days and are even allowing borrowers who are current on payments to qualify for short sale hardship.  There’s even strong momentum in Congress for extension of the Mortgage Debt Forgiveness Act that benefits borrowers who forfeit their homes through a short sale transaction.

Some have dubbed 2012 “The Year of the Short Sale.”  This is really the year that homeowners have an alternative that works in their favor when it’s clear they absolutely cannot afford their current payments or any level of reduced payment.   The short sale option could be the best option for a fresh start.

The Clock is Ticking for Homeowners Considering Short Sales

Having a foreclosure on one’s credit report will impact a credit score much more than will a short sale. If one is successful in completing a short sale, in many cases, he or she may qualify for a mortgage much sooner than with a foreclosure. Not surprisingly, short sales have thrived under the Mortgage Forgiveness Debt Relief Act, which allows homeowners who have received principal reductions on their mortgages as the result of loan modifications, short sales or foreclosures to avoid income taxation on the amounts forgiven. Under the debt relief law for qualified home owners, taxation can be avoided on forgiven mortgage amounts up to $2 million (married filing jointly) and $1 million for single filers. To be eligible, the debt must be canceled by a lender in connection with a mortgage restructuring, short sale, deed-in-lieu of foreclosure or foreclosure.

There have been 1.6 million short sales reported by the National Association of Realtors since late 2008, accounting for between 10 percent and 14 percent of home sales activity each month during that time. The Mortgage Forgiveness Debt Relief Act is not going to be extended beyond 2012. So if you’re a home owner contemplating a short sale, should you act now or hold off? Given the huge public and private resources now being devoted to helping financially distressed home owners — including the recently announced $25 billion national mortgage settlement with five major banks — you might assume that a key federal tax law benefit underpinning these efforts would be a shoo-in for renewal. Election-year politics, however, could doom renewal of the debt relief tax legislation and put large numbers of loan modification participants deeply in the hole.

The extension of the Mortgage Debt Forgiveness Act beyond December 31, 2012, therefore, is hardly a slam dunk. That being said, home owners contemplating whether to do a short sale now or wait until next year might be best served to take the “I’d rather be safe than sorry” stance and do their short sale before year end.

Short Sales as a Stepping Stone to Homeownership

Borrowers today have more options than ever keep their homes, ranging from proactive lenders reaching out to modify loans, to government and regulatory actions aimed to prevent more foreclosures. Moreover, today’s borrower takes a more prudent approach to their credit obligations, as evidenced by significant declines in consumer debt and delinquency levels across the board. However, there are still homeowners that have absolutely no backstop the ruin of a foreclosure. Usually, the only option left other than foreclosure is a short sale, which under today’s conditions is more favorable alternative. The lender accepts a lower price for the loan amount in return for removing  a non-performing asset off its books, and borrowers dodge the horrors of foreclosure by selling it. This is where the conversation usually ends with most short sale discussions.  Distressed borrowers, however, should be able to leverage the short sale process as a stepping stone that helps them gain a stronger financial footing to recoup their most valued asset --- a home.


First and foremost, distressed borrowers must be honest with themselves about their predicament when considering a short sale. They have to acknowledge early in the process that at some point in their near future they will not be able to make either their current mortgage payments, or even sustain reduced mortgage payments they would be eligible for through loan modification. This is the critical juncture where they decide relinquishing the home through a short sale is a viable route. The short sale wipes out the debt on the first lien, and many short sale negotiations include the cancellation of the debt owed as a result of difference between the remaining loan amount balance and the final sale price of the home. Borrowers may also be entitled to cash incentives through the government, the lender, or a combination of both through a short sale transaction. Moreover, a short sale clearly has a significantly smaller impact on a borrowers’ credit rating than a foreclosure. These are the obvious advantages to considering a short sale.
While it may appear that distressed homeowners initially lose their most valued asset, the long-term outcome is more optimistic. The true goal is actually for the distressed homeowner-now home seller to position themselves to comfortably handle the responsibilities of a mortgage for the long term. By relinquishing the debt of the original mortgage through the short sale, homeowners give themselves an opportunity to regroup financially and develop a savings routine based on new budgeting strategies. The fresh start allows the former homeowner to address other outstanding debt, and as a result build a stronger credit profile that would have a better chance of meeting today’s strict lending guidelines. The most important advantage to the former homeowner is that home prices, compared to when the original home was purchased, will be far more affordable when they are ready to enter the market again. While today’s low home values are projected to rise in the next cycle of the housing industry, they won’t approach the highs of the last cycle.

The homeowner who takes the high road by strategically exiting the mortgage via short sale has the opportunity to return as a homeowner on more stable footing with a home and mortgage that can be sustained.

Short Sale Your Home

Do you owe more than what your home is worth and are considering selling your home through the short sale process (selling your home for less than what you owe on the mortgage with the bank's approval and at no-cost to you), but the thought of doing so keeps you from taking action, because the task seems so overwhelming and confusing? If so, you are not alone. There are many families who have experienced the same frustration, but with a little effort and guidance, they were able to short sale their home and, ultimately, move on with their lives.

Below are 3 tips to help you feel confident about your short sale decision and increase your opportunity to experience a successful short sale transaction.

Tip #1: Become Informed
If you’re considering a short sale, it is recommended that you seek the professional help of an attorney and/or CPA.. These professionals will provide you with the information necessary to help you understand the legalities and tax consequences (if any) associated with a short sale. For example, in California, new legislation was enacted in 2011 that prevents banks from issuing deficiency judgments against homeowners after the bank has approved the short sale. However, there are details to these laws that you need to be aware of and understand.

Tip #2: Align yourself with a firm that specializes in short sales.
It’s important for you to know that realtors are not trained nor permitted to provide legal, tax or credit advice and most are not specifically-trained to handle all the facets associated with successfully completing a short sale. You will only get one chance to negotiate a way out of foreclosure through a short sale so it’s extremely important that the lender negotiation is handled correctly with a short sale specialist well-versed in the intricacies of the short sale process.

Tip #3: Begin the Short Sale Process Immediately
Procrastination is your worst enemy and waiting to receive a notice of default or notice of foreclosure proceedings means that valuable time has slipped away. The faster your short sale specialist begins negotiations with your lender, the closer you are to the likelihood of a successful short sale.
One final thought: A short sale has a significantly lesser impact on your credit rating than a foreclosure. So if you may ever want to purchase a home in the future, while you may have to wait several years following a foreclosure, you could qualify for a mortgage in as little as18 months with a short sale.

Short Sale Success Story: Condo Investment Property Including HOA Dues –Los Angeles, CA

We negotiated this short sale and obtained bank short sale approval for a condo in Los Angeles, CA. The owner bought it as an investment property for $485,000 with 1st and 2nd mortgages on the property totaling $425,000. As a result of deteriorating market conditions, the owner found herself owing more than the property was worth and the rental income not covering the combined load of mortgage and ancillary expenses. Foreclosure seemed inevitable. I Short Sale, Inc. negotiated the short sale of the property for $285,000, reduced the amount owed on the 2nd lien to $6,000 and negotiated negotiated a substantial reduction in back HOA dues. We can do the same for you.

Contact us at 877-907-4678 or at info@ishortsale.com

Short Sale Success Story: Negotiation on both 1st and 2nd Liens - Tarzana, CA

We obtained a bank short sale approval for a house in Tarzana, CA. The family purchased this house as a primary residence in 2004 for $1,000,000, and later refinanced to improve the house with two loans totalling $1,250,000. Declining income forced the couple to cut back on expenses, and when that wasn't enough to make ends meet, the mortgage payment was the next bill on the chopping block. The only outcome was foreclosure. I Short Sale, Inc. negotiated the short sale of the property for $750,000 including a settlement for the 2^nd mortgage for $10,000. The couple was able to obtain a fresh start for the new year.

Contact us at 877-907-4678 or info@ishortsale.com