Short-sale rule changes drive sales

More than four years after the foreclosure crisis familiarized Americans with short sales – selling properties for less than the outstanding balances on their mortgages – the barriers to completing them are slowly coming down.
The nation’s large mortgage lending and servicing banks, unprepared and reluctant to deal with the demand for short sales at the height of the crisis, have slowly built resources and procedures for dealing with them.
Government pressure and federal spending on foreclosure prevention pushed them along, as did the losses and fallout that came with repossessing homes.
And now government-backed mortgage giants Fannie Mae and Freddie Mac, which own about half the residential mortgages in the country, are starting to get serious about short sales.
In June, the Federal Housing Financing Authority, the agency that oversees Fannie and Freddie, issued 30-day deadlines for the banks servicing their loans to respond to short-sale requests.
Then last month, the FHFA relaxed the rules for accepting short sales on Fannie-and-Freddie-owned loans, while establishing a fixed compensation rate for the holders of second-liens on mortgages going through short sale.
The new rules, which go into effect Nov. 1, “will enable lenders and servicers to quickly and easily qualify eligible borrowers for a short sale,” a news release announcing the changes said.
The most significant change allows homeowners who are still current on their federally owned loans, but facing imminent financial trouble, to qualify for a short sale. Before, only those who already missed payments were eligible.
Bryant University finance professor Peter Nigro, who follows Fannie and Freddie, said the new guidelines look geared to mollify those in the government pushing the mortgage giants toward principal reduction.
“[Federal Housing Finance Agency Acting Director Edward J. DeMarco] has been vehement [against] principal reductions, and I guess this is the next best thing in dealing with their portfolio,” Nigro said. “He is a lifetime bureaucrat, and Fannie and Freddie have created a huge hole in budget,” which will grow even larger based on the new rules. Nearly as important as the new eligibility rules, Nigro said, is the $6,000 cap on compensation for the holders of second and third liens, who in the past had held up short sales in an effort to reduce the size of the loss they would have to take.
In many cases, the servicer of a Fannie-Freddie mortgage originated, and may hold, the second-lien, which was used to “piggyback” the primary loan and offer the kind of no-money-down financing that was rampant during the housing bubble.
This arrangement can make the servicer reluctant to accept a short sale that wipes out the second lien and in many cases $6,000 is not going to cover it.
“Those could be big losses and losses that would fall on the banking system,” Nigro said. “Everybody wants to delay writing off the losses as long as they can.”
Other changes include streamlining the short-sale paperwork for eligible homeowners, providing special treatment for relocated members of the military and automatic approvals for borrowers who can prove hardships including divorce, disability, a family death or new job more than 50 miles from home.
For those borrowers who qualify, Fannie and Freddie promise not to pursue a “deficiency judgment” against them for the shortfall between the loan balance and sale proceeds.
Realtor Karl Martone, who has become a short-sale specialist at The Martone Group in North Smithfield, welcomed the new rules and wished they had been in place before.
“Everything that they are doing is excellent – I wish they had done it sooner,” Martone said.
For the second-lien holders, Martone said $6,000 might not sound like much, but it’s more than they have been getting in many instances. “The second mortgage is always the red-headed stepchild,” Martone said. “Often they would get nothing.”
While the volume of total distressed sales (short and foreclosure) has declined since the low point of the recession, short sales have played a growing role in lender foreclosure prevention efforts.
As part of the $25 billion national foreclosure-abuse prevention settlement signed this year, Rhode Island is slated to receive $173 million from the country’s five largest lenders to help homeowners.
Between March 1 and June 30, Rhode Island has received $26.7 million in borrower relief and $20.3 million of it was from 185 short sales, according to figures from Joseph A. Smith, monitor of the Office of Mortgage Settlement Oversight.
Bank of America led the way with $11.4 million in Rhode Island short sale losses, Chase had $7.3 million, CitiBank had $606,000, Ally Bank had $542,000 and Wells Fargo had $405,000.
Chase lost the most per borrower, $122,000, and CitiBank the least, $55,000 per borrower.
Amy Kempe, a spokesman for R.I. Attorney General Peter F. Kilmartin, said the disproportionate share of relief from short sales was likely because they were the fastest thing to process and other forms of relief will start showing up over the three years the banks have to comply with the settlement.
Back in North Smithfield, Martone said the two pieces of good news surrounding short sales is that they are becoming easier to complete and the need for them is starting to ease as the market stabilizes.
“They have been easier to get through in last year-and-a-half – not as much lost paperwork and the response time is less,” Martone said. “We have a much smaller epidemic than what we had in the past. I am doing as much business, but less of it is in short sales.” •

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