Help with short sales - but is it enough?
We have heard over and over again the difficulty with short sales and in some respects the practice varies by lender but those loans managed by mortgage servicers suffer from an inherent conflict of interest. There are incentives for servicers to drag out the process as long as possible. It takes weeks or months to get a response from the banks, who misplace packages and give ask repeatedly for information to be sent over and over again. While the local market in Doylestown, Bucks and Montgomery County and Philadelphia is not as bad as other areas we are seeing our share of short sales.
The U.S. Treasury has issued guidance in its new Home Affordable Foreclosure Alternatives Program (HAFA) taking effect April 5, 2010 (some servicers are already modifying their programs to be compliant). HAFA provides incentives in accepting a short sale or a deed-in-lieu of foreclosure (DIL) on a loan eligible for modification under the HAMP program. HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac (they will be implementing their own versions of HAFA shortly).
Here are the highlights of the HAFA program:
1. Servicers have 10 days to approve or disapprove a request for short sale.
2. Uses borrower financials and other documents already submitted for a loan modification.
3. Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
4. Prohibits servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
5. Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed). This is huge for sellers that are already in financial difficulty.
6. Uses standard processes, documents, and timeframes/deadlines.
7. Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors (note holders). Note: This may not be enough but its something.
8. Caps proceeds to second lien holders at $3,000.00. note: This may not be enough either but the alternative can be that second lien holders get nothing.
Requirements:
1. Loan must be HAMP eligible – Services must evaluate a buyer for a HAMP modification first before giving any consideration for a HAFA short sale or Deed in Lieu (DIL);
2. Property is borrower’s principal residence;
3. Mortgage is a first lien and was originated before January 1, 2009;
4. The loan must be delinquent or default reasonably foreseeable;
5. Loan amount limit is 729,750;
6. Borrower’s total monthly payment exceeds 31 percent of the home owner’s income and attested to by affidavit;
7. Sale must be an arm’s length agreement and the buyer must agree not to sell the property for 90 days. Note: This may have an adverse effect on short sales purchased by investors.
8. Requires property to be listed with a real estate broker;
These steps may stem off some foreclosures and help homeowners in need but in the end may be too little and a bit too restrictive. The incentives are too small to force investors to accept a short sale and the 90 day sale provision will not work for investors.
In the end the numbers are the numbers. If it costs less for the investor to accept a Short Sale than to Foreclose, than the lender can and should do just that. Hopefully this will help in situations that the loan servicer simply gets in the way because they make more money by dragging out the process. Maybe this will be one of those instances where government regulation makes things easier and works. Then again, maybe not……