The new regulations are part of the U.S. Treasury's Home Affordable Foreclosure Alternatives (HAFA) program, designed to speed up the short sale process and encourage buyers to look at properties offered for short sales. In the past, the only way a lender would agree to a short sale, in general, is if the homeowner has defaulted and stopped paying on the mortgage. Under the new rules, sellers can be current on their payments and possibly still qualify.
The New RulesNot all sellers will qualify under the new rules, and real estate agents should expect to field questions about what qualifications are required. According to the Making Home Affordable website, homeowners underwater on mortgages backed by Fannie Mae or Freddie Mac may be eligible for the HAFA short sale program if the following apply:
- They can document financial hardship (see following paragraph)
- They have not purchased a new house in the past 12 months.
- Their first mortgage is less than $729,750.
- The mortgage was issued on or before January 1, 2009.
- They have not been convicted of any felonies in connection with a mortgage or real estate transaction.
Under these regulations, homeowners may qualify automatically for a short sale whether or not they are current on their mortgage payments if they can document certain hardships, including:
- Death of a borrower or co-borrower
- Divorce or legal separation
- Illness or disability
- Need to move more than 50 miles for a new job
- Relocating military personnel
Borrowers who are current on their payments but who have lost their job may also qualify, but will need to be approved by Freddie Mac or Fannie Mae prior to approval of the short sale.
Short sales may be expedited for borrowers at least 90 days behind on their mortgage with a credit score below 620; these homeowners will not have to document financial hardship or get approval directly from Fannie or Freddie.
The Short Sale TimelinesGenerally the biggest problem with short sales, both for sellers and agents, is the uncertainty of the process. The sale could only be completed with the agreement of the mortgage holder, and lenders could take months to decide whether or not to accept an offer from a potential buyer. Short sale properties might be on the market much longer than other properties in the same neighborhood because the uncertainty discouraged potential buyers.
With the changes that go into effect November 1st, the lender must decide up front the minimum amount it is willing to accept as payment for the property. HAFA also speeds up the process by setting deadlines that both the lender and homeowner have to meet. And, as an incentive for sellers, if the property is left in good shape the seller can receive $3,000 in moving expenses.
The Loan Servicer's ObligationsUnder the HAFA guidelines, if a mortgage is owned or backed by Fannie Mae or Freddie Mac, then the loan servicer has a set of deadlines it is required to follow once a short sale has been requested. The bank or mortgage company must:
- Acknowledge receipt of the short sale offer within three business days.
- Respond to the initial request for a short sale within 30 days.
- Decide on the "minimum acceptable net proceed," the smallest amount of money the company is willing to accept in payment of the mortgage.
- Respond to the Request for Approval of Short Sale (buyer's offer) within 10 days; if the offer meets the minimum acceptable net proceed, the lender is required to accept it.
The Homeowner's ObligationsOnce the homeowner has requested a short sale, they will receive a "short sale agreement" document from the mortgage holder. The homeowner has two weeks to complete the document and all requested documentation accompanying it.
After the homeowner has submitted all necessary paperwork, the real estate agent has four months to sell the house. In the meantime, the homeowner should continue to make mortgage payments, which can be adjusted for income.
Potential IssuesThe new rules are designed to speed up and simplify the short sale process, but there is still the potential for problems that might discourage both sellers and buyers. HAFA rules require the lender to establish the minimum net proceed, but there's no guarantee the lender will tell the homeowner what it is. The rules don't specify that the lender must share this amount with the borrower. So, while the seller's mortgage servicer may decide more quickly if an offer will be accepted, the buyer still may not have any idea if they are in the ballpark.
Second mortgages and home equity loans or lines of credit may still prove a stumbling block for some sellers. Fannie Mae and Freddie Mac will offer up to $6,000 to second-lien holders to expedite a short sale, but the lender cannot ask the homeowner for any more money. This may discourage some secondary lenders from signing off on the short sale. The secondary lender is also not obligated to follow the same deadlines if the loan is unsecured by Fannie or Freddie.
While the regulations also are considered part of the contract between the loan servicer and Fannie Mae or Freddie Mac, and the timelines are mandatory, there are no set penalties for lenders that don't comply with the new rules.