Housing prices continue to rise and foreclosure rates continue to fall (isn’t that nice to read for once). And changes made a year ago to the federal rules regarding short sales are expected to enhance that trend. The housing market crash made short sales—selling a home for less than what is owed on the mortgage to avoid foreclosure—enticing. However, it was often an inaccessible option for homeowners who suddenly found themselves underwater and running out of time to make it through the quagmire of red tape.
The federal changes streamline the short sale process, which could prevent more foreclosures and, in turn, increase real estate values. That would give an added boost to the NH market, which saw a 21 percent increase in home sales between 2011 and 2012 and a 9 percent decrease in foreclosure filings, according to the NH Association of Realtors and RealtyTrac. Whether new rules lead to more short sales depends on lenders and realtors being on board, and buyers and sellers having the patience to complete the process.
Less Paperwork
Completing a short sale used to require the patience of Sisyphus and helpful friends and family willing to provide housing for the months it could take for the transaction to go through. Short sales on mortgages backed by Fannie Mae or Freddie Mac typically required applications, supplemental materials, written explanations, a signed purchase and sale agreement on the property, a certain number of missed mortgage payments, and several weeks or even several months of review. Too often the mass of paperwork was never enough. Inevitably, the lender or servicer of the mortgage came back with requests for additional paperwork, additional explanation and additional proof, before denying the short sale outright. Alternatively, because of the wait and uncertainty, the interested buyers walked away. Either result would almost certainly spell foreclosure.
On Nov. 1, 2012, the Federal Housing Finance Agency (FHFA) implemented changes to the short sale rules to consolidate several different short sale programs into one streamlined process, providing relief to more eligible borrowers. The new guidelines also created a more defined and uniform process for all parties, complete with application and review deadlines to cut down on miscommunication between loan servicers and borrowers.
One of the biggest guideline changes permits borrowers who are current on their mortgage to qualify for a short sale. These borrowers, however, still need to meet eligibility requirements, but under a narrower definition of hardship, which now includes the death of a borrower or co-borrower, disability, divorce, or employment relocation more than 50 miles away. Finally, so long as all eligibility requirements are met, requests for short sale relief may be finalized by the loan servicer independently, without approval from Fannie Mae or Freddie Mac.
For borrowers most in need of getting out from under their mortgages, the new guidelines reduce or eliminate the documentation formerly required for application and approval, which was the source of major delays and uncertainty. The biggest change in rules was the replacement of two complicated documents with a shorter simpler one that prevents the short sale from being terminated if the seller does not get the paperwork back to the lender in time.
The guidelines also address military personnel receiving Permanent Change of Station (PCS) orders. PCS orders, which require military personnel to relocate quickly, now automatically qualify military personnel for a short sale, and like civilians who meet all requirements, military personnel are eligible for a short sale even without missing a mortgage payment. In addition, under the new policy, military personnel will be under no obligation to contribute funds to cover the shortfall between the outstanding loan balance and the sales price on their homes.
Easier Math
One concern for borrowers seeking and receiving short sale relief has historically been the difference between the balance due on the outstanding mortgage and the amount the lender accepted in the short sale. Under the new guidelines, borrowers are asked to make a contribution toward that deficiency based on an evaluation of their existing assets. In exchange for that contribution, Fannie Mae and Freddie Mac waive their rights to chase the borrower for any further deficiency after the short sale.
Including the deficiency contribution and evaluation as part of the approval process helps minimize the steps and unpleasant surprises in the short sale process. Military personnel are not required to make a deficiency contribution.
The guidelines also limit to $6,000 the payment that can be made to an outstanding second mortgage. Prior to the new guidelines, a second mortgagee could hinder the process due to a high payoff figure. In some cases, the second mortgagee’s demands could prevent a short sale.
Market Stabilization
All of these guidelines offer the chance to help stabilize commercial and residential real estate prices. However, what these guidelines really mean for the real estate market depends wholly on whether servicers, lenders, borrowers, buyers and sellers take full advantage of them. As with any new guidelines, it takes time to implement them, and more time to work out any issues that arise, which will likely be numerous, with each short sale application depicting a unique circumstance.
Residential short sales will help revitalize the lending market by taking care of bad debt and getting new borrowers and buyers to the table to purchase homes that might otherwise become bank-owned properties. Assuming the kinks are addressed and short sales become increasingly successful, it will ultimately mean fewer foreclosures, fewer bank-owned properties and fewer vacant properties. This could also be a step in the right direction in terms of keeping cities and commercialized areas up and running.
Bosen is an attorney with Bosen & Associates in Portsmouth, where he specializes in business law, real estate and litigation. He can be reached at bosenandassociates.com or jbosen@bosenandassociates.com.
Current Issue - May 2024