If you’re underwater and facing financial distress, what might Fannie Mae’s and Freddie Mac’s new short-sale reform policies mean for you? Potentially a lot — even if you are current on your mortgage payments and never imagined that a short sale and principal reduction could be in the cards.
Here’s what’s involved. Starting Nov. 1, owners whose loans have been purchased or guaranteed by Fannie or Freddie may qualify for a short sale if they fit key hardship criteria including: unemployment; divorce; long-term disability; a change in job location that is more than 50 miles from the current home; a business failure; death of the primary or secondary wage earner; or a natural or man-made disaster.
Short sales allow borrowers and lenders to avoid the crushing costs of foreclosure by bringing in a new purchaser for the house at what is normally a price well below the amount owed to the lender. In a successful sale, the distressed owner receives a write-down of the portion of the principal not covered by the new buyer’s price.
In what could be a far-reaching change, Fannie and Freddie will allow borrowers who are current on their mortgage payments — not just seriously delinquent, as traditionally has been required — to qualify for short sales, provided they fit the hardship criteria. Borrowers who are considered “most in need,” — that is, they are far behind on payments, have depressed credit scores and are facing financial stress — will be eligible for streamlined processing of short sales, involving reduced documentation and much speedier resolutions than usual.
Under rules that took effect in June, loan servicers already are required to operate on fast timelines for short-sale requests. They are supposed to respond to borrower requests for short sales within 30 days of receipt of an offer by a purchaser, and they must give applicants a final decision within 60 days of receipt of a completed short-sale package.
In the past, short sales often have been drawn out and contentious, sometimes taking nine months or more to close. They have also had a high rate of failure and cancellations, when buyers get frustrated and bail out of the transaction after waiting for banks and loan servicers to make decisions and process paperwork. Banks that hold second mortgages or credit lines secured by the house have been another choke point. As lien holders, they can block the entire transaction if they feel they are not being properly compensated along with the holder of the first mortgage, and they have frequently blown up deals with their demands. Under the new Fannie-Freddie rules, second-lien holders will be entitled to a maximum of $6,000 from proceeds of the sale.
The broadening of short sales to those who are current on their mortgage payments but encountering serious hardships could help huge numbers of underwater homeowners. Although the Federal Housing Finance Agency has no estimates of how many borrowers might be assisted by the change, its acting director, Edward J. DeMarco, has said that 4.63 million loans in Fannie’s and Freddie’s combined portfolios are underwater, and that approximately four-fifths of these are current on payments.
To Alexis Eldorrado, managing broker of Eldorrado Chicago Real Estate, a firm that specializes in short sales, opening up the market to people who have continued to make on-time payments despite having negative equity “is a very big deal.” Elizabeth Weintraub, a short-sale expert and author based in Sacramento, said she “was blown away” by the revised policies. She added that the new rules won’t solve all the problems, however. For example, banks owed large sums on second mortgages may not be satisfied with the $6,000 maximum payoff to release their liens, even though they know that in a foreclosure their second liens likely would be worthless because the holder of the first lien must be paid first.
Among other key changes in Fannie and Freddie short sales:
●Members of the armed forces who receive permanent change-of-status orders and are underwater will be automatically eligible for short sales, even if they are current on their loan payments.
●In states where Fannie and Freddie have the legal right to pursue “deficiencies” when short-sale proceeds do not pay off the existing debt, they will waive that right and instead ask borrowers who have sufficient assets or income to make “cash contributions” or execute promissory notes to cover part of the shortfall.
Ken Harney’s e-mail address is firstname.lastname@example.org.