Short Sale Commander Blog

Fannie Mae has decided that certain distressed borrowers who agree to give up their homes as an alternative to foreclosure should get a second chance at homeownership sooner.

The policy change, announced Wednesday, is meant to reward borrowers for cooperating with their loan servicers and to support the housing market.

The government-sponsored enterprise told lenders that for borrowers who grant a deed-in-lieu of foreclosure, it will shorten the minimum waiting period to be eligible for a new Fannie mortgage. Currently such consumers must wait at least four years. Beginning with applications submitted July 1, the period will drop to two years, provided the borrower puts at least 20% down on the new home.

Credit experts called the change an acknowledgement that borrowers who work with their lenders are better risks than those who simply mail in the keys.

“It makes sense to be a little bit kinder to borrowers who have made an effort to do something about the loan and did not just walk away and say it was the lender’s fault,” said John Ulzheimer, the president of consumer education at Credit.com Inc., a lead generator. “Someone who fights to complete a short sale is likely to be a continuing strong credit risk going forward if they are not saddled by a disadvantaged mortgage.”

Still, the change is not a giveaway. Fannie also set stricter parameters for borrowers who have tried to rehabilitate themselves. If they can make only a 10% down payment on the new home, the wait period remains four years after granting the deed-in-lieu.

Fannie officials would not discuss the changes beyond the lender bulletin, which said the GSE’s goal was “to support overall market stability and reinforce the importance of borrowers working with their servicers when they have difficulty repaying their debt.”

The announcement comes on the heels of the Obama administration’s Home Affordable Foreclosure Alternatives program, which began April 5. It aims to streamline the complicated processes of short sales and deeds-in-lieu. The program is aimed at homeowners who do not qualify for a loan modification and industry experts expect a dramatic increase in such “preforeclosure actions” this year and next.

In a short sale, the home is sold for less than is owed on the mortgage and the lender accepts a discounted payoff.

Mortgage lenders have expressed concern that a dearth of homebuyers will cripple a housing recovery. At least 6 million homeowners have gone through a foreclosure in the past three years and another 3 million are expected to this year, according to RealtyTrac Inc., an Irvine, Calif., data tracker.

Such borrowers are essentially shut out of the housing market because, with a foreclosure in the last five years showing up on their credit report, they are not eligible for loans that can be sold to Fannie and Freddie Mac.

“People in trouble don’t really understand the credit system,” said Rayman Mathoda, the president and chief executive of AssetPlan USA, a Long Beach, Calif., firm that arranges short sales. “From a credit standpoint, a short sale, a deed-in-lieu and a foreclosure are all the same thing.”

Mathoda has teamed up with other mortgage executives to lobby the Treasury Department and the GSEs to adopt a plan, called Second Chance, that would give a wide range of borrowers who have lost their homes the chance to be rehabilitated after two years if they undergo credit counseling. “A short sale is a proactive resolution to a credit problem, while a foreclosure is reactive,” she said.

Holders of secondary financing can derail process

Are you wondering why it takes so long to get short sales approved? The real reasons may be very different from what you might believe.

It would seem when prices are down and millions of homeowners owe more than their home is worth that it is in everyone’s best interest to approve a short sale. All the more so when Mortgage Bankers Association statistics show that a foreclosure costs the lender 30 percent more than a short sale.

As any agent or consumer who has tried to close a short sale offer will tell you, closing a short sale is usually a very long and complex process.

In July of last year, a Washington Post article stated that Bank of America was going to streamline its short-sale process so that it would only take seven days to obtain a short-sale loan approval.

Judging from the numerous blog posts from both consumers and agents, this has yet to occur in a large portion of the short-sale market. To be fair, any lender could complete the approval process in seven days, but the delays often result from other parties in the transaction.

One of the biggest issues in closing short sales is secondary financing. If the holder of the first mortgage is going to have to take a loss, it usually is reluctant to give any type of payoff to another lender who is in second position.

The holder (or holders) of the secondary financing can refuse to cooperate unless it receives part of the sale proceeds.

A common request that many secondary lenders seem to be making is for 10 percent of their loan amount. If the loan goes to the loss recovery department, the request can be $5,000 plus 10 percent of the loan balance.

What’s messy here is that the holder of the first mortgage may have a cap on what it will allow to be paid to any secondary lien holders.

The challenge for agents and consumers is how to negotiate through this complicated maze. If there is secondary financing on the property, one strategy is to approach the second mortgage holder first to see what its requirements are in terms of payoff.

You must also know what the first mortgage holder will require. Most lenders have specific guidelines about how big of a reduction they are willing to take, as well as how much can be paid to other lien holders.

Knowing this information ahead of time is critical if you want to avoid wasting your time on a transaction that won’t ever close.

An additional twist in this scenario is that many first and second mortgage holders are now checking the homeowner’s credit. If the homeowner is keeping up other payments and is applying for a short sale, the lender may not agree to the short sale unless the homeowner is willing to sign a promissory note for the shortfall.

Otherwise, the lender may choose to foreclose, which could force the borrower into bankruptcy.

Complicating issues even further, many borrowers who placed less than 20 percent down on their property have private mortgage insurance (PMI).

Here’s an example of PMI: Assume that a borrower is putting 10 percent down and obtaining a 90 percent loan. The lenders normally would require a 20 percent downpayment and would give an 80 percent new loan. PMI insures the 10 percent “difference” between the borrower’s down payment and what would have been an 80 percent loan amount.

What seems to be a common source of frustration for both agents and consumers is that the PMI companies have joined the lender in asking homeowners to sign a promissory note for the shortfall amount.

PMI companies are insurance companies. Like other insurance companies, it’s simply good business for PMI companies to limit their losses and payout. If the consumer will agree to the promissory note, then that reduces the PMI company’s losses, which looks better on its balance sheet.

On the other hand, if the PMI company agrees to the short sale, it has to make an immediate payout on the lender’s claim. By refusing to approve the short sale, the PMI company forces the lender to foreclose on the property.

The foreclosure process can take months to complete, and then even more time before the property sells and closes as a bank-owned property (also known as real estate-owned or REO). The net effect for the PMI company is that it puts off paying its claim for 12-24 months.

Also, if the market improves, the lender’s claim may actually be less one to two years from now than it is today.

Here’s the final zinger, however.

Suppose that a property has declined in value by 20 percent, completely wiping out the holder of a 10 percent second mortgage. The holder of the first mortgage offers the holder of the second a 5 percent payout to close the transaction.

The second trust deed holder says “No,” because if they file a claim for mortgage insurance they get the full 10 percent. Thus, a number of major lenders who have made equity loans may have an additional incentive not to agree to a short sale.

This may explain why so many holders of secondary financing are unwilling to agree to a short sale and prefer a foreclosure instead.

To be fair, there are many reputable lenders and companies that are doing everything they can to help consumers. Sadly, as an agent or a consumer, you have no way of knowing what the various requirements will be with the lenders you are working with on your short sale.

WASHINGTON — The government launched a new effort yesterday to speed up the time-consuming, often-frustrating process of selling your home if you owe more than it’s worth.

The Obama administration will give $3,000 for moving expenses to homeowners who complete such a sale — known as a short sale — or agree to turn over the deed of the property to the lender. The effort is designed for homeowners who are in financial trouble but don’t qualify for the administration’s $75 billion mortgage modification program.

Owners will still lose their homes, but a short sale or deed in lieu of foreclosure doesn’t hurt a borrower’s credit score for as much time as a foreclosure. For lenders, a home usually fetches more money in a short sale than a foreclosure. And the bank avoids expensive legal bills, cleanup fees, and maintenance costs that follow a foreclosure.

“It’s very traumatic and embarrassing and frustrating to go through a foreclosure,’’ said Laurie Maggiano, policy director of the Treasury Department’s homeownership preservation office. With a short sale, she said, “your financial issues are your own problem and not neighborhood conversation.’’

Falling home prices and lost jobs have forced many sellers into this position. For example, in Orange County, Calif., short sales made up about 26 percent of the market in March, compared with 17 percent a year earlier, according to data complied by Altera Real Estate, a local brokerage. In the Minneapolis-St. Paul metro area, about 12 percent of all deals since October were short sales, up from about 8 percent a year earlier, according to the Minneapolis Area Association of Realtors.

The expanded incentives will help accelerate short sales, said Mark Zandi, chief economist at Moody’s Analytics. He expects 350,000 homeowners nationwide to use the program through the end of 2012, more than double his earlier forecast.

For buyers, though, short sales can be a great opportunity.

Marco Cappelli, 49, a winemaker from Northern California, is planning to buy a short sale this month in the Sierra Nevada foothills. He and his wife are paying $214,000 for a property that had been listed at $270,000. They plan to fix it up and rent it out to vacationers.

Along with the financial incentives, the new government program makes another key change. Mortgage companies will have to set their minimum bid before the house is listed for sale. If the offer is above that, the lender must accept it.

That’s a big change from current practice. Lenders generally don’t calculate how much money they are willing to accept on a short sale until they have an offer in hand, causing long delays before the sale is approved