The Freddie Mac Standard Short Sale
Freddie Mac recently announced uniform short sale servicing guidelines with the introduction of the “Freddie Mac Standard Short Sale.” The Freddie Mac Standard Short Sale is the government’s latest attempt to make the short sale process more efficient for loan servicers, buyers, sellers and real estate professionals. The Standard Short Sale means faster approvals, requires the lenders to waive their deficiency rights against the homeowner and, most important, provides uniform guidelines regarding cash contributions, promissory notes and relocation assistance incentives. In short (no pun intended), the Freddie Mac Standard Short Sale effectively takes the guesswork out of all Freddie Mac short sales and clears the way for more distressed homeowners to avoid foreclosure.
The Federal Housing Finance Agency, who acts as Fannie Mae and Freddie Mac’s conservator, issued identical Fannie Mae short sale guidelines in an effort to standardize the short sale approval process for all loans owned or backed by the government sponsored enterprises. Fannie Mae and Freddie Mac own or guarantee a majority of the outstanding mortgages in the United States.
The Fannie Mae and Freddie Mac short sale servicing guidelines remove obstacles on all government backed loans by streamlining the short sale approval process so more homeowners can avoid foreclosure. The short sale servicing guidelines, which went into effect November 1, 2012, are intended to provide lenders and loan servicers with uniform short sale procedures making the short sale transaction faster, easier and more transparent.
The Freddie Mac short sale guidelines implement consistent borrower response timeframes to help facilitate faster short sale approvals. Servicers must acknowledge receipt of a purchase offer within three business days. Servicers must also notify the borrower within five business days from receipt of the purchase offer if any additional items are needed to evaluate the offer.
Lenders and loan servicers have 30 days to make a final decision from the time they receive a complete short sale application. The loan servicer automatically receives an additional 30 day extension if they need to negotiate the approval with third parties, such as mortgage insurance companies. A final decision, however, is required in the first 60 days.
As someone who exclusively negotiates short sales, my experience is mostly positive since the Freddie Mac short sale guidelines went into effect last November . I have found, however, that many servicers are unaware of the new guidelines and fail to abide by the required response timeframes. For the most part, however, written short sale approval letters are obtained much faster and a good short sale professional should be able to get a Freddie Mac short sale approved 60-75 days from the date of submission.
The Freddie Mac short sale guidelines provide lenders and loan servicers with delegated authority to approve short sales for both current or delinquent homeowners. A loan servicer has absolute delegated authority to approve a short sale for homeowners who are 31 days or more delinquent on the mortgage payments. In contrast, the servicer has delegated authority for homeowners who are 31 days or less late on their mortgage payments as long as the homeowner has a qualified hardship. Qualified hardships under the Freddie Mac Standard Short Sale program include the following:
- Divorce or separation;
- Death of borrower or primary wage earner;
- Borrower or dependent family member has long term disability;
- Distant employment transfer or relocation;
- Permanent Change of Station Orders for members of the military
For homeowners who are current on their mortgage (31 days or less delinquent) and don’t have one of the aforementioned qualified hardships, they may still be eligible for the Standard Short Sale. In these situations, the servicer does not have delegated authority to approve the loan and, therefore, must submit the file to Freddie Mac for approval. Borrowers who do not have an eligible hardship may qualify for a short sale if there is a risk of property ownership to Freddie Mac, such as pending litigation or deteriorating property condition that could jeopardize a successful foreclosure sale. Basically, all types of borrowers can qualify for the Freddie Mac Standard Short Sale as long as one can make the argument the a short sale would be in the best interest of all parties. Consequently, the Freddie Mac short sale servicing guidelines make the short sale process easier for all types of loans because loan servicers have delegated approval authority on qualified short sale offers as well as the ability to obtain approval from Freddie Mac for any homeowner who doesn’t have one of the qualified hardships.
The Freddie Mac short sale guidelines provide more transparency to the short sale transaction by providing standardized cash contribution requirements, making uniform subordinate lien payoff amounts, creating short sale incentives and requiring the underlying investors to waive their deficiency rights against the homeowner following a short sale.
Borrowers who are current or less than 31 days delinquent must make a cash contribution at closing in accordance with the financial means test. The Financial means test measures the homeowner’s expense to income ratio. Servicers must comply with the financial means test to determine whether borrowers who are more than 31 days delinquent are subject to making a cash contribution or signing a promissory note at closing. Borrowers are not required to make a cash contribution at closing if they are 90 days or more delinquent with a credit score of 620 at the time of the short sale submission.
Subordinate lien holders will be required to accept an aggregate payment of $6,000 in exchange for releasing each subordinate lien, extinguishing the underlying debts, and waiving their rights to pursue a deficiency judgment against the homeowner. Perhaps most important, the Freddie Mac servicing guidelines explicitly state that the Servicer, for itself and on behalf of Freddie Mac, must waive all rights to pursue payment of the remaining deficiency balance owed by the borrower on the underlying Freddie Mac-owned mortgage. If, however, the borrower agrees to a promissory note as part of the settlement and fails to meet their obligation, Freddie Mac reserves the right to pursue collections for the balance of the promissory note.
Freddie Mac will provide servicers with $2200 upon the completion of a short sale. Servicers also receive credit from the government under the terms of the $8.5 Billion mortgage settlement agreement for completing a short sale and, thus, modifying a homeowner’s mortgage. Eligible borrowers can receive up to $3,000 in relocation assistance at closing. Servicers may, at their discretion, offer the borrower additional financial incentives from their own funds to complete the short sale, but servicers cannot deduct this payment from the short sale proceeds.
Freddie Mac requires all servicers to establish an escalation process and to communicate it to borrowers in writing. This includes a dedicated toll free 800 number. Most servicers already include a single point of contact on monthly mortgage statements or foreclosure notices. Fannie Mae similarly has a short sale escalation tool designed for issues such as valuation disputes, servicer delays, or uncooperative subordinate lien holders. Agents can also use the process to get a recommended list price before putting a property on the market. In practice, one may still find it difficult to escalate a Freddie Mac short sale because all contact remains with the servicer on behalf of Freddie Mac. It is very common for the servicer to present take it or leave it offers from Freddie Mac as well as unreasonably high property valuations. For this reason, the use of an experienced short sale negotiator or real estate professional is imperative to obtaining short sale approval on Freddie Mac backed loans.
The Freddie Mac Standard Short Sale
The Freddie Mac Standard Short Sale means faster approvals, requires the lenders to waive their deficiency rights against the homeowner and provides uniform guidelines regarding borrower eligibility, cash contributions, promissory notes and relocation assistance incentives. In effect, the Freddie Mac short sale servicing guidelines have taken the guesswork out short sale transactions for all Freddie Mac backed loans. Similarly, the Fannie Mae Short Sale Guidelines provide transparency for all loans backed by Fannie Mae. Consequently, short sale approvals are much easier to obtain on all government backed loans.
If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.
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.