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Fannie, Freddie now allow short sales on current loans
Homeowners who are current on their mortgage payments but headed for trouble have new options this week.
Mortgage giants Fannie Mae and Freddie Mac on Thursday launched a revamped and cohesive short sale program that now allows a short sale without missed payments and without requiring repayment of the loan balance.
The new program comes in the wake of years of complaints about fragmented and outdated GSE policies and is designed to put both government-sponsored enterprises on the same page when it comes to short sales, with the same borrower qualifications, timelines and processes.
The Federal Housing Finance Agency, which oversees Fannie and Freddie, announced the new guidelines in September to address the issues that distressed homeowners face in today’s real estate market.
The new program guidelines include:
NO MISSED PAYMENTS: Following in the footsteps of servicers and major lenders, GSEs will now allow homeowners who are current on their mortgages to complete a short sale … if they have a qualified hardship.
What is a valid hardship for a short sale with no missed payments? Imminent default threats such as death of borrower, divorce, disability or a job relocation of at least 50 miles, to name a few.
Some major banks already allow short sales on non-GSE loans with no delinquencies in an attempt to head off future foreclosure and a greater loss.
HEADED FOR FORECLOSURE: Borrowers who are at least 90 days behind and have credit scores below 620 will have their short sales put on a fast track for approval, and they will not have to provide hardship documentation to qualify.
ONE SET OF RULES: Servicers will have one set of clear guidelines to evaluate, process and execute short sales, eliminating the confusion that currently reigns on GSE programs.
JUNIOR LIENHOLDERS: Second lienholders can receive 100 percent of the outstanding lien, up to $6,000, to approve a short sale. In California, the $6,000 cap can be lower than necessary, especially if the junior lien is a home equity line of credit with a balance greater than $100,000. Lenders often want 10 percent to 20 percent of an outstanding HELOC balance, creating situations in which a home buyer may have to contribute extra money toward that lien.
But GSE programs previously allowed only 6 percent, up to $6,000, to junior lienholders.
The HAFA short sale program recently increased its maximum-allowed junior lien payoff to $8,500 to deal with demanding juniors.
ACTIVE MILITARY: Military personnel who have a permanent change of station order can short sale their home without missed payments and without the threat of having to pay the loan balance.
These changes went into effect earlier this year.
CONDENSED TIMELINE: The new guidelines fold in deadline restrictions that took effect in June. Servicers must respond to a short sale request within 30-60 days of receiving a complete package.
If the servicer is unable to respond within 30 days, they will have an additional 30 days to evaluate the short sale, but they also must provide weekly updates during that period.
A response could be an approval, rejection or counter-offer.
NO DEFICIENCIES: Outside California, Fannie and Freddie will waive their rights to pursue homeowners for the balance of the loan after a short sale, though the seller may have to make a cash contribution or sign a promissory note.
In California, state laws prevent lenders from pursuing the deficiency balance after a short sale, in most cases.
Fannie and Freddie own or guarantee more than half of U.S. mortgages. The FHFA now oversees the agencies after a $170 billion government bailout in September 2008.
“These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” FHFA Acting Director Edward J. DeMarco said in a release.
WHY SHORT SALE?
Fannie and Freddie are putting more emphasis on short sales because they make the most financial sense.
Short sales net banks 12 percent to 25 percent more than they would gain from a foreclosure because of the time and expense to take back, repair, maintain, market and resell a property. And as many as half of loan modifications re-default within the first year, later turning into foreclosures and short sales.
Thus short sales continue to increase, especially in Southern California, as lenders streamline processes and create attractive offers to help distressed homeowners. A short sale allows a homeowner to avoid a financially devastating foreclosure, limit damage to their credit, and re-enter the housing market much more quickly as an able buyer — before home values again shoot through the roof.
More importantly, a short sale allows a homeowner to exit their house on their own terms, with dignity intact.
Want to know if you qualify for the newly updated short sale guidelines? Call us today at 951-778-9700, and we’ll do the research for you.
Brian Bean and Tim Hardin, owners of Dream Big Real Estate in Riverside, are Default Advocates and ambassadors for Helping A Million Homeowners. They can be reached at 951-778-9700, PE@DreamBigRealEstate.com or at www.DreamBigRealEstate.com and www.ShortSaleAndStay.com.
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