New rules expand short sale options
WASHINGTON — Starting Nov. 1, owners whose loans have been purchased or guaranteed by Fannie Mae or Freddie Mac may qualify for a short sale if they fit key hardship criteria.
The criteria include: unemployment; divorce; long-term disability; a change of employment that is more than 50 miles from the current home; a business failure; death of the primary or secondary wage earner; or a natural or man-made disaster.
Short sales let borrowers and lenders avoid the crushing costs of foreclosure by bringing in a new purchaser for the house at a price well below the amount owed to the lender. In a successful sale, the distressed owner receives a write-down of the portion of the principal not covered by the new buyer's price.
In what could be a far-reaching change, Fannie and Freddie will allow borrowers who are current on their mortgage payments — not seriously delinquent as traditionally required — to qualify for short sales, provided they fit the "hardship" criteria. Borrowers who are considered "most in need," that is, they are far behind on payments, have depressed credit scores and are facing financial stress, will be eligible for streamlined processing of short sales, involving reduced documentation and much speedier resolutions than usual.
Under rules that took effect in June, loan servicers already are required to operate on fast timelines for short sale requests. They are supposed to respond to borrower requests for short sales within 30 days of receipt of an offer by a purchaser and must give applicants a final decision within 60 days of receipt of a completed short sale package.
In the past, short sales often have been drawn out and contentious, sometimes taking nine months or more to close. They have also had a high rate of failure and cancellations, when buyers get frustrated and bail out of the transaction after waiting for banks and loan servicers to make decisions and process paperwork.
Banks that hold second mortgages or credit lines secured by the house have been another choke point. As lien holders, they can block the entire transaction if they feel they are not being properly compensated along with the first mortgage holder, and have frequently blown up deals with their demands. Under the new Fannie and Freddie rules, second lien holders will be entitled to a maximum of $6,000 out of the sale proceeds.
The broadening of short sales to those who are current on their mortgage payments but enduring serious hardships could help huge numbers of homeowners.
Though the Federal Housing Finance Agency has no estimates of how many borrowers might be assisted by the change, acting director Edward J. DeMarco has said 4.63 million loans in Fannie's and Freddie's combined portfolios are underwater, and that approximately four-fifths of these are current on payments.
Among other key changes in Fannie and Freddie short sales:
• Members of the armed forces who receive permanent change-of-status orders and are underwater will be automatically eligible for short sales, even if they are current on their loan payments.
• In states where Fannie and Freddie have the legal right to pursue "deficiencies" when short sale proceeds do not pay off the existing debt, they will waive that right and instead ask borrowers who have sufficient assets or income to make "cash contributions" or execute promissory notes to cover part of the shortfall.