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.