Fannie Mae Streamlines Short Sale Transactions
Fannie Mae announced new short sale guidelines this past August in an effort to streamline short sale transactions. The Fannie Mae short sale guidelines, which went into effect November 1st, are designed to simplify the short sale approval process for all loans owned or guaranteed by Fannie Mae. According to the Federal Housing Finance Agency (FHFA), who oversees both Fannie Mae and Freddie Mac, these government agencies back three out of every four residential mortgages in the United States.
The new Fannie Mae short sale guidelines have been successful in that they have taken the guesswork out of many aspects of the short sale transaction. According to the Fannie Mae short sale guidelines, qualified homeowners no longer need to be delinquent on their mortgage in order to be eligible for a short sale, approval timeframes have significantly improved, and all lenders are required to waive deficiency rights against the homeowner.
This does not, however, mean that the Fannie Mae short sale guidelines are an unmitigated success. Perhaps unintentionally, the new guidelines have resulted in higher lender appraisals, more frequent requests for cash contributions, and the elimination of lender paid third-party short sale processing fees. I examine below the effect of the new Fannie Mae short sale guidelines on homeowners, lenders, servicers and real estate professionals.
No Longer Required To Be Delinquent On Their Loan
Prior to November 1st, 2012, Fannie Mae did not permit lenders or servicers to participate in short sales unless the borrower was in “imminent threat” of default. Imminent threat was narrowly defined as being 31 days or more delinquent on your mortgage payments. Many homeowners, therefore, were told they could not complete a short sale unless they stopped making mortgage payments.
Under the new Fannie Mae short sale guidelines, however, a borrower may be current on their mortgage and still satisfy the imminent threat of default requirement as long as they have a qualified hardship. Qualified short sale hardships include the death of a borrower or co-borrower, divorce or legal separation, illness or disability or a distant employment transfer or relocation.
This development cannot be overstated. The Fannie Mae short sale guidelines finally provide a definitive answer to the question of whether a homeowner must stop making mortgage payments in order to be eligible for a short sale. As a result, qualified homeowners are now eligible for a Fannie Mae short sale without missing any mortgage payments.
This change is important because missed mortgage payments, not the actual short sale event itself, determine how a short sale affects your credit score. According to the new guidelines, a qualified homeowner may complete a short sale without ever missing a mortgage payment, which, in turn, won’t negatively affect their credit score.
The Fannie Mae short sale guidelines do clarify, however, that a homeowner must wait two years following a short sale in order to obtain another government backed mortgage loan. In comparison, a homeowner must wait up to seven years following foreclosure and seven years after a bankruptcy.
Deficiency Rights Automatically Waived
Perhaps the most important effect of the new Fannie Mae short sale guidelines is that lenders and servicers are now required to waive all deficiency rights against the homeowner. As a short sale negotiator, my primary objective is to get the offer approved and get the lender to release the homeowner from all debt obligations. By waiving their deficiency rights, the lender is releasing the homeowner from their legal obligation to pay back the entire mortgage note balance.
The waiver of deficiency rights should not be confused with short sale tax consequences. Once the lender agrees to waive their deficiency rights, they issue a form 1099c to the homeowner. The onus is then on the homeowner to prove to the IRS that they qualify for a recognized tax exemption, such as the Mortgage Debt Relief Act 2007, so they are not taxed on the cancelation of debt income.
Gone are the days of negotiating a short sale for 3-6 months only to find out at the last minute that the lender would not waive their deficiency rights. This was the ultimate deal killer. Although a major development, it does not come without its disadvantages.
Increased Likelihood of a Cash Contribution or Promissory Note at Closing
Fannie Mae will waive their right to pursue deficiency judgments against the homeowner in exchange for a financial contribution when a borrower has sufficient income or assets to make a cash contribution or sign a promissory note at closing.
The new Fannie Mae short sale requirements set forth the “financial means test” in order to determine whether the homeowner has the financial ability to “share in the loss.” The financial means test takes into account the homeowner’s cash reserves as well as their future debt-to-income ratio. The loan servicer will review the borrower’s monthly income and expenses in order to calculate his or her debt-to-income ratio.
More often than not, I am finding that solvent homeowners are being asked to make a cash contribution or sign a promissory note at closing under the new Fannie Mae short sale guidelines. Contributions can be as little as $1,000, and most lenders allow the cash contribution to be paid by third-parties.
Subsequent Home Purchase No Longer Disqualifies Homeowner
In the past, lenders and servicers could not approve a short sale if the homeowner subsequently purchased another property. This policy affected many homeowners who innocently purchased a new home following an employment relocation or job transfer only to later discover that they couldn’t sell their previous home due to the market collapse.
According to the new Fannie Mae short sale guidelines, the servicer will review a borrower’s credit report for any new mortgage loans during the term of the borrower’s financial hardship. If, during the term of the hardship, the borrower purchased another primary residence, the servicer can approve the short sale without Fannie Mae approval only if the hardship was due to distant or new employment transfer (at least 50 miles away) or receipt of PCS orders.
If the borrower has a hardship other than those listed above, and has purchased another residence during the term of the hardship, the servicer must submit the short sale request to Fannie Mae for written approval. While the new policy likely excludes homeowners who voluntarily upgraded to a larger home before the market collapsed, it no longer penalizes homeowners who purchased another home following a job relocation.
The new Fannie Mae short sale guidelines streamline documentation requirements for all lenders and servicers. Fannie Mae significantly reduced the documentation required to complete a short sale, including requiring no documentation of a borrower’s hardship if they are 90 days or more delinquent and have a credit score lower than 620. The no proof of hardship policy removes barriers for those homeowners who are most in danger of foreclosure and increases servicer efficiency in completing a short sale.
Lenders and Loan Servicers
Pursuant to the Fannie Mae short sale guidelines, all servicers will have the delegated authority to approve and complete short sales on all loans owned by Fannie Mae as long as they conform to the new requirements. It is also important to note that this delegation of authority includes agreements with mortgage insurance companies.
Mortgage insurers provided lenders with insurance polices against homeowner default in exchange for collecting monthly premium payments. When the market collapsed, mortgage insurers weren’t able to pay all of the insurance claims so they successfully negotiated settlements with Fannie Mae and Freddie Mac.
Prior to these settlements, independent short sale approval was required from mortgage insurers on all loans with mortgage insurance. In contrast, the new short sale guidelines enable lenders and servicers to approve short sales without requiring independent approval from underlying investors and private mortgage insurance companies.
By consolidating all short sales into a uniform program and granting delegated approval authority, the new short sale guidelines make it easier for lenders and servicers to process all short sale requests, regardless of whether the loan has mortgage insurance.
Under the Fannie Mae short sale guidelines, the US Treasury provides incentive payments to servicers and lenders who comply with the new short sale requirements. In the past, servicers unilaterally prevented short sale approval because they made their money by “servicing” the loan on behalf of lenders or investors and had little incentive to approve the short sale. Apparently, the new incentives are substantial enough to get the lenders, servicers and underlying investors on the same page regarding the objective of the transaction-getting the short sale approved and avoiding foreclosure.
Subordinate lien payments limitations
Fannie Mae now limits subordinate-lien payments to $6,000. Previously, subordinate lien holders often attempted to negotiate higher payments in an attempt to mitigate their losses. The servicer will now be able to offer the maximum payment of $6,000 to all subordinate lien holders in order to facilitate the transaction. In setting a maximum payoff amount, Fannie Mae removed the guesswork by standardizing the short sale transaction and requiring all subordinate lien holders to accept a uniform payout amount on every transaction.
Getting first and second lien holders on the same page regarding total payoff amounts is a major step forward in improving short sale approval time-frames because subordinate lien holders no longer have the proclivity to delay the short sale approval in hopes of obtaining a higher payoff. The streamlined procedures and uniform payoff requirements should make the approval process more efficient for both lenders and loan servicers.
Lenders and servicers now have clear and consistent guidelines making it easier to process short sales because the government has consolidated all existing short sale programs into a single program. Lenders no longer have to keep track of the various program requirements which led to widespread confusion and multiple requests for documents. The end result should be a a more transparent short sale process with quicker approval timeframes and more short sale approvals.
Real Estate Professionals
No More Guesswork
The Fannie Mae short sale guidelines have officially taken (most of) the guesswork out of the short sale transaction for real estate professionals. In the past, the burden was on the third-party short sale negotiator to first determine whether the homeowner qualified for a short sale only to hope that the lender agreed. Often times the loan would be submitted to the lender’s proprietary short sale program only to be removed and re-submitted as a government short sale. This is no longer the case because lenders, servicers and investors are all on the same page due to the single-track program and the uniform eligibility requirements should improve short sale approval timeframes.
No Third-Party Negotiation Fees
Fannie Mae no longer permits third-party short sale negotiation fees to be paid by the lender on the HUD settlement statement. Honestly, lenders and investors have never been on the same page regarding third-party negotiation fees so, on the one hand, it is nice to finally have a definitive rule in place. On the other hand, I find it curious that the investors are unwilling to compensate the individual who is the driving force behind getting the transaction closed. Fortunately, Fannie Mae still offers to pay the full real estate commission as well as all customary seller paid closing costs on behalf of the seller.
Higher Appraised Values
Perhaps the most controversial development, as well as the most frustrating, is Fannie Mae’s minimum net proceeds amount required on all short sales. Most lenders send a local real estate agent to the property to complete a Broker Price Opinion (BPO). In the past, the BPO figure was used as the benchmark value against which the short sale offer was measured.
Under the new Fannie Mae short sale guidelines, however, the investor is demanding a “minimum net proceeds amount well above the lender’s BPO value. The minimum net proceeds amount is derived from the loss Fannie Mae is willing to take on the transaction and has very little to do, if anything, with the BPO value.
One can only speculate that Fannie Mae is attempting to mitigate their losses by demanding higher sales prices. In practice, however, this has caused many short sales to die because the buyer is unwilling to overpay and the seller is at the mercy of the underlying investor. Lenders and servicers are equally frustrated by this development because Fannie Mae is keeping them from getting the short sale incentives. Something is bound to give. Stay tuned…
Fannie Mae Short Sale Guidelines and 2013 Short Sale Forecast
More Homeowners Qualify, Lenders More Efficient
Fannie Mae completed 38,717 short sales through the first six months of 2012 and 70,025 in full year 2011. With the new short sale guidelines, I expect the short sale numbers to be even higher in 2013. The Fannie Mae short sale guidelines demonstrate the government’s latest effort to avoid foreclosure and prevent home values from decreasing further by encouraging loan servicers to participate:
“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, senior vice president, National Servicing Organization, Fannie Mae. “We want to help as many homeowners avoid foreclosure as possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us. These new guidelines will open doors to help more homeowners qualify for short sales, remove barriers to completing short sales, and make the process more efficient for homeowners and servicers.”
Fannie Mae has taken a number of steps to make the short sale process more efficient, including implementing a Short Sale Assistance Desk to help real estate professionals in targeted markets work out challenges in individual short sales, requiring servicers to complete short sale evaluations within 60 days and making military families who receive Permanent Change of Station orders eligible for a short sale.
If you are a Homeowner struggling to make your payments and considering a short sale, visit www.knowyouroptions.com to determine whether Fannie Mae owns your loan.
If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo at 617-264-0376 to schedule a free short sale consultation.
About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.