Fannie and Freddie’s HAFA Program: Good News and Bad News

Fannie Mae and Freddie Mac loans were exempt from the HAFA short sale program that was put into effect by the Treasury on April 5, 2010. Fannie Mae has just created its own version of HAFA with regulations that you can find at http://shortsalesr.us/FannieMaeHAFA.pdf. Similarly, Freddie Mac has created its version of HAFA with regulations you can read at http://shortsalesr.us/FreddieMacHAFA.pdf .

Does this addition to HAFA make you happy? In general, the terms are similar to the Treasury’s short sale program that is supposed to expedite the review and approval of short sales by pre-approving the seler for the short sale and establishing the amount the lender will accept at the time the Short Sale Agreement (SSA) is entered into. In other words, you qualify the seller and get the amount needed from the sale at the time you list the property. However, there is a difference with Fannie and Freddie. With the Treasury’s program, the lender considering the short payoff may tell the Realtor how much they will settle for. For those of you who do a lot of short sales, they will specify the amount they want to be paid at closing as shown on line 504 of the HUD.

In the Fannie and Freddie program, the servicer is prohibited from telling the seller, buyer and Realtor what this amount is. Instead, the servicer will establish an asking price based on the condition of the market in the area. Who is better at setting an asking price: (1) the Realtor who works there every day or (2) a Loss Mitigation negotiator with files from all over America? When the contract is submitted, you hope that this asking price results in the Minimum Acceptable Net Proceeds (MANP). If you do HAFA short sales, you have to love the acronyms .

Having the Broker Price Opinion or appraisal already done at the time the offer is presented is a benefit, and the servicer does not tell the Realtor what the acceptable net proceeds are in most of the non-HAFA short sales (except for FHA short sales where you know to the penny). So, in this manner the program gives a benefit of the BPO already being done and the same result as the old fashioned short sale where you play “guess again” on the amount the lender wants. But, it could have been better if Fannie and Freddie followed the Treasury’s lead.

The other bad news is that the servicer tells the Realtor how to market the property, and supervises the marketing plan. Again, who knows better what will work (1) the Realtor who has developed an effective program or (2) the loss mitigation negotiator who just took the HAFA training course. The guidelines mandate that the marketing program includes ” a “For Sale” sign, Multiple Listing Service(s), flyers, print ads, open houses as well as appropriate usage of the internet;” Few will argue with a for sale sign and putting it in the MLS, but open houses work less than 2% of the time according to NAR statistics. Print ads have dramatically fallen because they are not that effective. However, if you want to comply with the Short Sale Agreement you will do these things, because the agreement can be cancelled if you violate it.

Another problem is that a seller cannot be considered for a Fannie or Freddie HAFA short sale if a foreclosure is pending that could sell the property in 60 days, or if the state laws would allow a foreclosure in the next 60 days. States like Texas can go from a dead start to a full foreclosure in less than 60 days, so does that mean you cannot do a Fannnie or Freddie HAFA short sale in those states?

There are some great benefits. The servicer must respond to an offer within 10 business days. That beats the months of waiting we do now. The servicer must allow at least 45 days to close the sale after approval, with a maximum of 60 days. Also the foreclosure must be postponed during the sale period, which is at least 120 days.

The financial incentives are similar. The seller gets $3,000 in moviing assistance. The servicer gets more under Fannie and Freddie than the Treasury by receiving $2,200 for an approved short sale, as opposed to $1,500 for the Treasury.

So, like everything else in short sales, there is some good news and some bad news. But, at least there is a program that provides some tools that a savy Realtor can use to help a borrower in trouble.

For the complete Fannie Mae guidelines go to http://shortsalesr.us/FannieMaeHAFA.pdf and for the Freddie Mac guidelines go to http://shortsalesr.us/FreddieMacHAFA.pdf

Chose a Trained Agent to Rescue You with a Short Sale

An experienced agent will save you with a sale that relieves all your debt.

Or, You Could Crash and Burn with an Untrained Short Sale Agent

 

Choose only agents who are trained as Short Sale Negotiating Specialists to safely do a short sale.

HAFA Short Sales Explained

On November 30, 2009, the U.S. Treasury issued new guidelines under the Making Home Affordable program to
create the Home Affordable Foreclosure Alternatives Program (HAFA).  Those guideliens were modified March 26, 2010 and the HAFA program went into effect April 5, 2010.   If HAFA  is implemented widely, the Short Sale
process could completely change. The new program will reverse the Short Sale procedure
from the Realtor’s perspective.

Now, the Realtor and the seller take all the risk associated with Short Sales. They hope
the seller will qualify for a Short Sale and they hope they will get a sales price high enough to be acceptable to the lender. They will not find out until they receive an offer, sign the sales contract, submit it to the lender and get it reviewed by a loss mitigation negotiator. If the seller does not qualify or the sales price is not high enough, the Short Sale will not be approved, and all the time, money and effort are wasted.

 With the new program, the seller’s financial qualification for a Short Sale is determined at the beginning of the
process. Also, the lender gets an idea of the market value of the home with an appraisal or Broker’s Price Opinion (BPO). The lender cannot charge the borrower/seller for this evaluation. Then, the lender lets the listing agent and the seller know what they will accept to pay off the loan, i.e. the net proceeds that the lender needs. The lender can express this amount as a specific amount in dollars, a percentage of the market value or as a percentage of the lender’s suggested list price. So, you will know how much you need from the sale of the property for the Short Sale to succeed.
The lender will also review the title to the property. While they are not obligated to do a title search, the lender will use their resources to find all the liens on the property. There are Short Sale listing agents who do not follow my procedure of doing a title search when I list a property, and they get surprised with other debts just before closing. Under HAFA, there should be fewer surprises.
In short, the essential features of the Short Sale are reviewed and approved at the time the listing is taken and all
of this goes into a Short Sale Agreement (SSA). The primary decision to be made after an offer is submitted to the lender is whether the proposed contract gives the lender the money they said they would take as full settlement.
The process creates standardized documents, so all the lenders will use the same forms. My staff will love this, because
every lender currently wants to use their own forms.

Some of the main forms are a Short Sale Agreement (SSA) used in conjunction with listing the property for sale and the Request for Approval of a Short Sale (RASS) used when an offer is submitted. The minimum amount of time allowed to sell a property under the HAFA Short Sale is 120 days, so listing agents have at least 120 days to get an offer. By the way, the lender cannot increase the amount they want to receive from the sale during this period. The Short Sale period may be extended by the lender for up to 12 months, so you have to get an offer within a year at most.

 During the time that the Short Sale Agreement is in effect, the lender can start a foreclosure proceeding
and move it along toward a sale date, but the lender cannot complete a foreclosure. So, all those calls I have to
make to lenders reminding them to postpone the foreclosure sale while they are considering a Short Sale should not be necessary under these regulations.

The guidelines specify that the lender needs to respond to a proposed contract within 10 business days. Many Short
Sale Realtors look in wonder at that short time frame, as they are used to waiting for months. How is that possible? The
primary review to be made after the contract is submitted is whether the amount the bank receives is higher or lower than what they have agreed to accept. Under the current Short Sale review procedure, the loss mitigation negotiator goes through about 70 to 100 pages of Short Sale package, much of which is complicated financial information. Under the new program, the negotiator will look at the HUD-1 for the net proceeds and compare that number to their pre-approved number.

 By the way, the servicer must consider the seller/borrower for a Short Sale under HAFA within 30 days of the seller failing to qualify for a loan modification, failing to comply with a loan modification or requesting that the servicer consider the seller for a Short Sale. So, the time limit for responding to the seller’s request to qualify the seller for a
Short Sale is only 30 days, considerably shorter than many lenders’ time to review a Short Sale application.
Currently, there is a large battle over whether the lender will give the seller/borrower a full release from the entire obligation under the note. When the property was purchased, the borrower signed a note (promise to pay) and
a deed of trust (allows the property to be security for the loan). A Short Sale can close if the lender releases just the
deed of trust that secures the property. However, good real estate agents also want the seller to be fully released from
the entire obligation under the note, so the seller/borrower will not be hounded by collection efforts after the sale. Under the HAFA program, the lenders have to give the seller/borrower a full release from the obligation of the note, and the lenders cannot require the seller to sign a note to make additional payments after the sale closes. This requirement also applies to any mortgage insurer of the loan, so the seller walks away without any further obligation on this debt.

Another battle that rages with current Short Sales revolves around “Commissionectomy,” where the lender tries to
cut the real estate agent’s commission in a short sighted effort to make more money on this one sale (and lose much more money when the agents will not do Short Sales with them again). Under the new program, the amount of the commission is agreed as a part of the Short Sale Agreement. The guidelines prohibit the lender from attempting to cut the commission after that. I enjoy the irony that the regulations say the maximum commission is 6 percent, so the government can fix a uniform commission for real estate agents even though the same government’s Justice Department engaged in extensive litigation against the real estate industry claiming that commissions where price fixing has occurred hurt the consumer.
The biggest battleground with current Short Sales occurs when there is more than one lien on the property. The
property can have multiple mortgages and other secured debts like judgment liens. The lender that is in first position
wants as much money as possible, and does not want the other lenders to get hardly any. The junior lenders want
as much as they can, typically at least 10 percent of the outstanding balance of the debt. The November guidelines provided that the junior lien holders will get an aggregate of $3,000 (with a maximum of 3 percent of the principal balance for any one lien).  That provision was modified March 26, 2010 to double these numbers so that the junior lien holders can get 6% of their outstanding balance, up to a total of $6,000 for all the junior liens.    In other words, if you have a second, third and fourth lien, the total paid to all three was going to be up to $3,000, now it is up to $6,000.   I do not see this provision establishing peace between the lien holders. The junior lien holders may still want to get more money, as $6,000 may not be enough to settle a $100,000 second loan. In other words, the Realtors are still going to have to use the negotiating tools they have learned to get this battle settled.  However, citing the HAFA regulations as a higher authority to convince a junior lien holder that $6,000 is reasonable will give real estate agents another tool in their tool box. If you want to learn negotiating tools for Short Sales, go to www.ShortSaleNegotiatingSpecialist.com  .

There are financial benefits to the seller and the lender under the HAFA program. If the lender completes the Short
Sale, the loan servicer was going to receive $1,000 from the Treasury under the November guidelines.  That amount has been increased by the March revison to $1,500. This helps a great deal with the servicer’s  cost of processing the short sale, and may allow the servicer to outsource the short sale to a firm like Stewart Lender Services with the $1,500 covering most, or all, of the cost.  If the first lien holder allows the second lien holder to receive $6,000, the Treasury will pay the investor who owns the note up to an additional $2,000, so this will help with the battle between the first and second lien holders. More specifically, the first lien holder gets one third of the amount allowed to the junior liens, up to a maximum of $2,000 under the terms of the March revision.  The November guidelines originally allowed for only $1,000 using the same formula of one third of the amount paid to the junior lien holders.
Take a moment to consider what this means to lenders with a large portfolio of loans that need modification or Short Sales. For example, Bank of America acquired the Countrywide portfolio that has an abundance of this type of loan. Some of the loss mitigation negotiators tell me that they receive between 500 and 1,000 Short Sale applications per day. If only half of those applications were approved, that is $375,000 to $750,000 per day. In other words, we are
talking about someplace in the range of $19,500,000 per year for a five day work week.  With that kind of income stream, Bank of America may be happy they bought Countrywide. How many loss mitigation negotiators could you hire if you were going to make that kind of money? Also, that money is not coming from a buyer who might change their mind or be unable to pay. It is coming from the Treasury who never runs out of funds. This provision of HAFA may be the most important, as it will allow lenders to staff up to handle the volume of Short Sales and decrease the time for a response.

Other financial incentives allow the seller to receive $3,000 from the sale as a moving allowance under the March revisions.  The November guidelines only allowed $1,500. This will help the seller move to a new location after the sale closes, which helps with the problem that real estate agents have in getting people who have no money to move. These funds might also be available to help negotiate a settlement with junior lien holders, or pay items like homeowners association dues and property taxes that become sticking points in Short Sale negotiations.
By the way, the Short Sale Agreement will specify which closing costs and expenses the lender will allow, so the
listing agent will know whether there will be problems getting certain expenses paid, like back homeowners dues.
The draft HAFA regulations that I reviewed had a number of provisions requiring the seller/borrower to be delinquent in their payments, using language that specified that the borrower is in default on the obligations of the note. I sent many emails objecting to this requirement. American society is built on the idea that those who fulfill their obligations should be rewarded. This requirement punished people who worked hard to be sure they made their mortgage payments, even when they were in financial trouble.  In some situations, there is a reason for requiring that
the seller/borrower be in default. For example, some of the agreements for Mortgage Backed Security (MBS) pools will
not allow a loan to be removed from that pool to start a Short Sale negotiation unless the borrower is delinquent in the
payments. Where this is a requirement, the borrower/seller will have to be made aware that they may have to hurt their credit even more by missing payments in order to qualify for a Short Sale.
For example, I was doing a Short Sale on a condominium in Raleigh, North Carolina where the investor was Fannie
Mae. Cartus, the servicer, would not proceed with the Short Sale until the borrower missed two payments, and then they would process the Short Sale. In other words, there would be many missed payments before the sale closed. I contacted Fannie Mae and the supervisors explained the MBS rule to me and said there were certain exceptions to these rules. My seller/borrower was recently married, just had a new baby, had other financial changes going on in his life where he did not want to harm his credit. With the cooperation of Cartus we were able to miss only one payment while they reviewed the Short Sale in advance of the missed payment. As soon as the payment was missed, the Short Sale was approved and the cash buyer closed the sale a few days later. In other words, it looked like the borrower had not made a payment in anticipation of the closing, something that frequently occurs when a payoff has been ordered by the escrow or closing attorney and making a payment confuses the payoff statement from the lender. Cartus took my suggestion and went out of their way to find a solution that complied with the MBS requirements and caused the least damage to the seller/borrower.
In general, the new HAFA regulations do not have a  blanket requirement that the borrower/seller be in default.
The regulations state that the borrower is delinquent or default is reasonably foreseeable. There are some minor vestiges of that idea that were not taken out, such as a phrase that says the lender may terminate the Short Sale review if the borrower brings the loan payments current. I object to the idea that a borrower could lose the Short Sale by working hard and making the payments. However, the provision is at the discretion of the lender, and I doubt that any lender would stop a Short Sale in process with a financially troubled homeowner just because they made the payments.

Real estate agents will love some of the provisions of these regulations. The property has to be listed with a licensed
agent who regularly sells in the area where the property is located. I believe this leaves out Redfin and similar firms that do not have a presence in the local area. The seller has to keep the property in marketable condition, so I will not
have to be turning on the utilities at some of my Short Sales in my name. The seller has to cooperate in the marketing
effort and respond to requests by the agent and the lender, so no more uncooperative sellers. Also, the Short Sale Agreement must give the buyer at least 45 days to close the sale, so real estate agents will not get an approval after months of waiting that says the buyer has to close in less time than anyone can get financing.
I enjoyed reading the part of the regulations that says the servicers must have adequate staff to comply with the
time limits of HAFA. Telling a borrower that they have the right to a Short Sale within 14 days of a determination on the loan modification, responding to a proposal to do a Short Sale with a Short Sale Agreement in 30 days and reacting to an offer within 10 business days will require major staffing increases by some lenders. The lenders are required to report how they are complying with HAFA to Fannie Mae.   Also, Freddie Mac audits the lenders to enforce its provisions.

Just like in any Short Sale, the transaction must be a good faith, arms-length sale. The seller cannot buy back the house after the sale, so those plans to sell to a cousin and buy it back will not work. In most situations, the seller will not be allowed to rent the home from the new buyer, unless that is allowed by the investor’s guidelines. One additional requirement is that the buyer may not sell the property for 90 days. This will cut off a number of “internet gurus” who tell people they can make fortunes flipping Short Sales. Similarly, the seller cannot receive any of the sale proceeds (other than the $3,000 relocation assistance) and cannot receive any of the commission. So, real estate agents who have been getting Short Sale listings by giving some of their commission to the seller will have problems.
The regulations specify that reporting a Short Sale to the credit bureaus requires a special comment, and the  regulations give an example of reporting the Short Sale as “account paid in full for less than the full balance”. There will be trouble for agents who try to get Short Sale listings by promising that there will be no reporting to the credit bureaus, or that they can avoid any adverse effect on the seller’s credit.
Are these new regulations the Godsend for Short Sale real estate agents? No, there are a large number of Short
Sales that are not covered by HAFA. First, they do not apply to loans owned or guaranteed by Fannie Mae or Freddie
Mac, which is a huge exception to the rules. However, at the National Association of Realtors convention in 2009, Fannie Mae executives announced a pilot program to study new Short Sale procedures that had some provisions that are similar to HAFA.
The November draft of the regulations said HAFA  Short Sales were allowed only on loans that have gone through the Home Affordable Modification Program (HAMP).   That provison was changed in the March revision, as any borrower can request a HAFA short sale.  However, the borrower must meet qualifications that are similar to the HAMP program.  In other words, the loan must be on the borrower’s principal residence, so it does not apply to investment
properties. The regulations also limit HAFA to loans where the outstanding principal balance is $729,750 or less (so that leaves out most luxury properties and many of the loans in states like California).  With the November verions of the regulations, the homeowner must have tried to do a loan modification under the HAMP regulations. So, if
someone just lost their job so that they do not have a prayer of qualifying for a modification, do they have to go through that procedure?  Not under the March revision to the guidelines. 

It does make some sense to couple the HAFA Short Sale with a HAMP modification, because the seller will have furnished the lender with the same financial information. However, some real estate agents may find the difference between modification and Short Sales interesting. When the borrowers are applying for a loan modification, they are trying to show financial strength to convince the lender that they can make the payments if they are modified. When the borrowers are applying for a Short Sale, they are trying to show financial weakness to convince the lender that they cannot make the payments and foreclosure is the other alternative.
The Short Sale Agreement may specify that the borrower/seller must make mortgage payments during the Short Sale period, but those payments cannot exceed 31 percent of the borrower’s gross monthly income. However, it is not mandatory that the agreement have a payment provision, and the forbearance of loan payments is specifically
allowed.

These regulations went into effect April 5, 2010, so lenders who participate in HAMP will have to have their procedures in place and their staff trained by then. If you want an extensive analysis of the HAFA program, I did a 90 minute webinar for the Council of Residential Specialists (CRS) of the National Association of Realtors that you can view by going to http://www.crs.com/Education/287?cid=W027R  . Actually, it was supposed to be 60 mintues to start, CRS said I had so much good information that they stretched it to 90 minutes, and it actually ran close to two hours because the 480 people who signed up for it participated so much at the end of the session that CRS kept it going.

These regulations for the Home Affordable Foreclosure Alternatives program are a huge step in the right direction because they change the process to be more rational. Most of the Short Sale decisions are made at the time the sales process starts. Then, the review is expedited so buyers do not have to wait for months to hear whether they bought a home. Then, there are financial incentives that compensate the servicer, the loan investor and the seller to make the process more financially viable. Finally, there will be no more “Commissionectomy” so Realtors will not be financially prevented from doing Short Sales.

 I hope these ideas spread like wildfire.

Short Sale Gets You Out of Trouble

Is your home underwater?  Do you owe more than it is worth, and you cannot afford the payments?  Don’t let yourself slip further and further into trouble.  This website has an abundance of resourses to help you.  You might want to consider a loan modification to change the payments so you can afford them.  You might look at giving the home to the lender if you only have one loan, using a deed in lieu of foreclosure.  The best answer for many homeowners is a short sale where you sell the home for less than what is owed and your Realtor convinces the lenders to take the net proceeds of the sale.  You do not have to pay off the rest of the loan at the closing if you qualify for a short sale. 

Click the Read First tab at the top of this website and you will get a guide to the choices available to you.  You can avoid foreclosure because there are several better choices.  If you cannot find the answers you need, we will help you personally if you send an email to tim@TimBurrell.com because our mission is to save America, its neighborhoods and our finacial system by helping homeowners avoid foreclosre.

Stop Stress With a Short Sale

 

Financial problems can cause you a great deal of stress.  You struggle to make the payments, or you fall behind on your mortgage, and the lenders send you scary letters.  You need to know your choices.  Foreclosure is one choice, but it is frequently not the best choice because it hurts your credit and makes it nearly impossible to get a good loan for 5 years, not to mention the effect on your family when you are evicted from the house by the authorities.   Loan modifications are available using the Home Affordable Modification Program (HAMP).  If you have only one loan, you can give the home to the lender using a deed in lieu of foreclosure.  There are some disadvantages for your credit and finances to the deed in lieu that are discussed in detail in a post on this website.  Many people find that a short sale will get them out of the house gracefully with the least damage to their credit. 

To get the information you need to decide what is best for you, click on the Read First tab on the top of this page.  You can also search in the search box at the upper right corner of this page by putting in the word or phrase that describes what you are looking for.  If you cannot find what you need, send an email to tim@TimBurrell.com so we can help you get rid of your stress.

New HAFA Short Sales

On November 30, 2009, the U.S. Treasury issued new guidelines under the Making Home Affordable program to
create the Home Affordable Foreclosure Alternatives Program (HAFA).  Those guideliens were modified March 26, 2010 and the HAFA program went into effect April 5, 2010.   If HAFA  is implemented widely, the Short Sale
process could completely change. The new program will reverse the Short Sale procedure
from the Realtor’s perspective.

Now, the Realtor and the seller take all the risk associated with Short Sales. They hope
the seller will qualify for a Short Sale and they hope they will get a sales price high enough to be acceptable to the lender. They will not find out until they receive an offer, sign the sales contract, submit it to the lender and get it reviewed by a loss mitigation negotiator. If the seller does not qualify or the sales price is not high enough, the Short Sale will not be approved, and all the time, money and effort are wasted.

 With the new program, the seller’s financial qualification for a Short Sale is determined at the beginning of the
process. Also, the lender gets an idea of the market value of the home with an appraisal or Broker’s Price Opinion (BPO). The lender cannot charge the borrower/seller for this evaluation. Then, the lender lets the listing agent and the seller know what they will accept to pay off the loan, i.e. the net proceeds that the lender needs. The lender can express this amount as a specific amount in dollars, a percentage of the market value or as a percentage of the lender’s suggested list price. So, you will know how much you need from the sale of the property for the Short Sale to succeed.
The lender will also review the title to the property. While they are not obligated to do a title search, the lender will use their resources to find all the liens on the property. There are Short Sale listing agents who do not follow my procedure of doing a title search when I list a property, and they get surprised with other debts just before closing. Under HAFA, there should be fewer surprises.
In short, the essential features of the Short Sale are reviewed and approved at the time the listing is taken and all
of this goes into a Short Sale Agreement (SSA). The primary decision to be made after an offer is submitted to the lender is whether the proposed contract gives the lender the money they said they would take as full settlement.
The process creates standardized documents, so all the lenders will use the same forms. My staff will love this, because
every lender currently wants to use their own forms.

Some of the main forms are a Short Sale Agreement (SSA) used in conjunction with listing the property for sale and the Request for Approval of a Short Sale (RASS) used when an offer is submitted. The minimum amount of time allowed to sell a property under the HAFA Short Sale is 120 days, so listing agents have at least 120 days to get an offer. By the way, the lender cannot increase the amount they want to receive from the sale during this period. The Short Sale period may be extended by the lender for up to 12 months, so you have to get an offer within a year at most.

 During the time that the Short Sale Agreement is in effect, the lender can start a foreclosure proceeding
and move it along toward a sale date, but the lender cannot complete a foreclosure. So, all those calls I have to
make to lenders reminding them to postpone the foreclosure sale while they are considering a Short Sale should not be necessary under these regulations.

The guidelines specify that the lender needs to respond to a proposed contract within 10 business days. Many Short
Sale Realtors look in wonder at that short time frame, as they are used to waiting for months. How is that possible? The
primary review to be made after the contract is submitted is whether the amount the bank receives is higher or lower than what they have agreed to accept. Under the current Short Sale review procedure, the loss mitigation negotiator goes through about 70 to 100 pages of Short Sale package, much of which is complicated financial information. Under the new program, the negotiator will look at the HUD-1 for the net proceeds and compare that number to their pre-approved number.

 By the way, the servicer must consider the seller/borrower for a Short Sale under HAFA within 30 days of the seller failing to qualify for a loan modification, failing to comply with a loan modification or requesting that the servicer consider the seller for a Short Sale. So, the time limit for responding to the seller’s request to qualify the seller for a
Short Sale is only 30 days, considerably shorter than many lenders’ time to review a Short Sale application.
Currently, there is a large battle over whether the lender will give the seller/borrower a full release from the entire obligation under the note. When the property was purchased, the borrower signed a note (promise to pay) and
a deed of trust (allows the property to be security for the loan). A Short Sale can close if the lender releases just the
deed of trust that secures the property. However, good real estate agents also want the seller to be fully released from
the entire obligation under the note, so the seller/borrower will not be hounded by collection efforts after the sale. Under the HAFA program, the lenders have to give the seller/borrower a full release from the obligation of the note, and the lenders cannot require the seller to sign a note to make additional payments after the sale closes. This requirement also applies to any mortgage insurer of the loan, so the seller walks away without any further obligation on this debt.

Another battle that rages with current Short Sales revolves around “Commissionectomy,” where the lender tries to
cut the real estate agent’s commission in a short sighted effort to make more money on this one sale (and lose much more money when the agents will not do Short Sales with them again). Under the new program, the amount of the commission is agreed as a part of the Short Sale Agreement. The guidelines prohibit the lender from attempting to cut the commission after that. I enjoy the irony that the regulations say the maximum commission is 6 percent, so the government can fix a uniform commission for real estate agents even though the same government’s Justice Department engaged in extensive litigation against the real estate industry claiming that commissions where price fixing has occurred hurt the consumer.
The biggest battleground with current Short Sales occurs when there is more than one lien on the property. The
property can have multiple mortgages and other secured debts like judgment liens. The lender that is in first position
wants as much money as possible, and does not want the other lenders to get hardly any. The junior lenders want
as much as they can, typically at least 10 percent of the outstanding balance of the debt. The November guidelines provided that the junior lien holders will get an aggregate of $3,000 (with a maximum of 3 percent of the principal balance for any one lien).  That provision was modified March 26, 2010 to double these numbers so that the junior lien holders can get 6% of their outstanding balance, up to a total of $6,000 for all the junior liens.    In other words, if you have a second, third and fourth lien, the total paid to all three was going to be up to $3,000, now it is up to $6,000.   I do not see this provision establishing peace between the lien holders. The junior lien holders may still want to get more money, as $6,000 may not be enough to settle a $100,000 second loan. In other words, the Realtors are still going to have to use the negotiating tools they have learned to get
this battle settled.  However, citing the HAFA regulations as a higher authority to convince a junior lien holder that $6,000 is reasonable will give real estate agents another tool in their tool box. If you want to learn negotiating tools for Short Sales, go to www.ShortSaleNegotiatingSpecialist.com .

There are financial benefits to the seller and the lender under the HAFA program. If the lender completes the Short
Sale, the loan servicer was going to receive $1,000 from the Treasury under the November guidelines.  That amount has been increased by the March revison to $1,500. This helps a great deal with the servicer’s  cost of processing the short sale, and may allow the servicer to outsource the short sale to a firm like Stewart Lender Services with the $1,500 covering most, or all, of the cost.  If the first lien holder allows the second lien holder to receive $6,000, the Treasury will pay the investor who owns the note up to an additional $2,000, so this will help with the battle between the first and second lien holders. More specifically, the first lien holder gets one third of the amount allowed to the junior liens, up to a maximum of $2,000 under the terms of the March revision.  The November guidelines originally allowed for only $1,000 using the same formula of one third of the amount paid to the junior lien holders.
Take a moment to consider what this means to lenders with a large portfolio of loans that need modification or Short Sales. For example, Bank of America acquired the Countrywide portfolio that has an abundance of this type of loan. Some of the loss mitigation negotiators tell me that they receive between 500 and 1,000 Short Sale applications per day. If only half of those applications were approved, that is $375,000 to $750,000 per day. In other words, we are
talking about someplace in the range of $19,500,000 per year for a five day work week.  With that kind of income stream, Bank of America may be happy they bought Countrywide. How many loss mitigation negotiators could you hire if you were going to make that kind of money? Also, that money is not coming from a buyer who might change their mind or be unable to pay. It is coming from the Treasury who never runs out of funds. This provision of HAFA may be the most important, as it will allow lenders to staff up to handle the volume of Short Sales and decrease the time for a response.

Other financial incentives allow the seller to receive
$3,000 from the sale as a moving allowance under the March revisions.  The November guidelines only allowed $1,500. This will help the seller move to a new location after the sale closes, which helps with the problem that real estate agents have in getting people who have no money to move. These funds might also be available to help negotiate a settlement with junior lien holders, or pay items like homeowners association dues and property taxes that become sticking points in Short Sale negotiations.
By the way, the Short Sale Agreement will specify which closing costs and expenses the lender will allow, so the
listing agent will know whether there will be problems getting certain expenses paid, like back homeowners dues.
The draft HAFA regulations that I reviewed had a number of provisions requiring the seller/borrower to be delinquent in their payments, using language that specified that the borrower is in default on the obligations of the note. I sent many emails objecting to this requirement. American society is built on the idea that those who fulfill their obligations should be rewarded. This requirement punished people who worked hard to be sure they made their mortgage payments, even when they were in financial trouble.  In some situations, there is a reason for requiring that
the seller/borrower be in default. For example, some of the agreements for Mortgage Backed Security (MBS) pools will
not allow a loan to be removed from that pool to start a Short Sale negotiation unless the borrower is delinquent in the
payments. Where this is a requirement, the borrower/seller will have to be made aware that they may have to hurt their credit even more by missing payments in order to qualify for a Short Sale.
For example, I was doing a Short Sale on a condominium in Raleigh, North Carolina where the investor was Fannie
Mae. Cartus, the servicer, would not proceed with the Short Sale until the borrower missed two payments, and then they would process the Short Sale. In other words, there would be many missed payments before the sale closed. I contacted Fannie Mae and the supervisors explained the MBS rule to me and said there were certain exceptions to these rules. My seller/borrower was recently married, just had a new baby, had other financial changes going on in his life where he did not want to harm his credit. With the cooperation of Cartus we were able to miss only one payment while they reviewed the Short Sale in advance of the missed payment. As soon as the payment was missed, the Short Sale was approved and the cash buyer closed the sale a few days later. In other words, it looked like the borrower had not made a payment in anticipation of the closing, something that frequently occurs when a payoff has been ordered by the escrow or closing attorney and making a payment confuses the payoff statement from the lender. Cartus took my suggestion and went out of their way to find a solution that complied with the MBS requirements and caused the least damage to the seller/borrower.
In general, the new HAFA regulations do not have a  blanket requirement that the borrower/seller be in default.
The regulations state that the borrower is delinquent or default is reasonably foreseeable. There are some minor vestiges of that idea that were not taken out, such as a phrase that says the lender may terminate the Short Sale review if the borrower brings the loan payments current. I object to the idea that a borrower could lose the Short Sale by working hard and making the payments. However, the provision is at the discretion of the lender, and I doubt that any lender would stop a Short Sale in process with a financially troubled homeowner just because they made the payments.
Real estate agents will love some of the provisions of these regulations. The property has to be listed with a licensed
agent who regularly sells in the area where the property is located. I believe this leaves out Redfin and similar firms that do not have a presence in the local area. The seller has to keep the property in marketable condition, so I will not
have to be turning on the utilities at some of my Short Sales in my name. The seller has to cooperate in the marketing
effort and respond to requests by the agent and the lender, so no more uncooperative sellers. Also, the Short Sale Agreement must give the buyer at least 45 days to close the sale, so real estate agents will not get an approval after months of waiting that says the buyer has to close in less time than anyone can get financing.
I enjoyed reading the part of the regulations that says the servicers must have adequate staff to comply with the
time limits of HAFA. Telling a borrower that they have the right to a Short Sale within 14 days of a determination on the loan modification, responding to a proposal to do a Short Sale with a Short Sale Agreement in 30 days and reacting to an offer within 10 business days will require major staffing increases by some lenders. The lenders are required to report how they are complying with HAFA to Fannie Mae.   Also, Freddie Mac audits the lenders to enforce its provisions.

Just like in any Short Sale, the transaction must be a good faith, arms-length sale. The seller cannot buy back the house after the sale, so those plans to sell to a cousin and buy it back will not work. In most situations, the seller will not be allowed to rent the home from the new buyer, unless that is allowed by the investor’s guidelines. One additional requirement is that the buyer may not sell the property for 90 days. This will cut off a number of “internet gurus” who tell people they can make fortunes flipping Short Sales. Similarly, the seller cannot receive any of the sale proceeds (other than the $3,000 relocation assistance) and cannot receive any of the commission. So, real estate agents who have been getting Short Sale listings by giving some of their commission to the seller will have problems.
The regulations specify that reporting a Short Sale to the credit bureaus requires a special comment, and the  regulations give an example of reporting the Short Sale as “account paid in full for less than the full balance”. There will be trouble for agents who try to get Short Sale listings by promising that there will be no reporting to the credit bureaus, or that they can avoid any adverse effect on the seller’s credit.
Are these new regulations the Godsend for Short Sale real estate agents? No, there are a large number of Short
Sales that are not covered by HAFA. First, they do not apply to loans owned or guaranteed by Fannie Mae or Freddie
Mac, which is a huge exception to the rules. However, at the National Association of Realtors convention in 2009, Fannie Mae executives announced a pilot program to study new Short Sale procedures that had some provisions that are similar to HAFA.
The November draft of the regulations said HAFA  Short Sales were allowed only on loans that have gone through the Home Affordable Modification Program (HAMP).   That provison was changed in the March revision, as any borrower can request a HAFA short sale.  However, the borrower must meet qualifications that are similar to the HAMP program.  In other words, the loan must be on the borrower’s principal residence, so it does not apply to investment
properties. The regulations also limit HAFA to loans where the outstanding principal balance is $729,750 or less (so that leaves out most luxury properties and many of the loans in states like California).  With the November verions of the regulations, the homeowner must have tried to do a loan modification under the HAMP regulations. So, if
someone just lost their job so that they do not have a prayer of qualifying for a modification, do they have to go through that procedure?  Not under the March revision to the guidelines. 

It does make some sense to couple the HAFA Short Sale with a HAMP modification, because the seller will have furnished the lender with the same financial information. However, some real estate agents may find the difference between modification and Short Sales interesting. When the borrowers are applying for a loan modification, they are trying to show financial strength to convince the lender that they can make the payments if they are modified. When the borrowers are applying for a Short Sale, they are trying to show financial weakness to convince the lender that they cannot make the payments and foreclosure is the other alternative.
The Short Sale Agreement may specify that the borrower/seller must make mortgage payments during the Short Sale period, but those payments cannot exceed 31 percent of the borrower’s gross monthly income. However, it is not mandatory that the agreement have a payment provision, and the forbearance of loan payments is specifically
allowed.

These regulations went into effect April 5, 2010, so lenders who participate in HAMP will have to have their procedures in place and their staff trained by then.
These regulations for the Home Affordable Foreclosure Alternatives program are a huge step in the right direction
because they change the process to be more rational. Most of the Short Sale decisions are made at the time the sales
process starts. Then, the review is expedited so buyers do not have to wait for months to hear whether they bought
a home. Then, there are financial incentives that compensate the servicer, the loan investor and the seller to make
the process more financially viable. Finally, there will be no more “Commissionectomy” so Realtors will not be financially prevented from doing Short Sales.

 I hope these ideas spread like wildfire.

Negotiate Short Sales Better: Find the Investor

Short Sales Need Artful Negotiating

Negotiating a short sale requires an understanding of the process. When you submit the short sale package, you are dealing with a servicer, who collects the payments and administers the loan. They do not have as much “skin in the game” as the investor who owns the loan. So, you need to be able to involve the investor to get the right result.

How do you find the investor? You can ask the servicer. Sometimes they will not tell you if you ask “who is the investor”? However, some servicers like Bank of America have rules that if you ask a question that can be answered yes or no, they will answer. So, ask if the investor is Fannie Mae?  If no, ask is the investgor Freddie Mac? You might get lucky.

The Internet provides an abundance of information. To see if the investor is Freddie Mac, go to
www.freddiemac.com/mymortgage and look it up. You can also call them at 1-800-FREDDIE (8am to 8pm EST). Similarly, to find out if the investor is Fannie Mae, go to www.fanniemae.com/loanlookup or call them at 1-800-7FANNIE (8am to 8pm EST). This brings up some legal requirements.

In order to use the online services for Fannie or Freddie, you need written authorization from the borrower. So, include this in your letter of authorization that you get the seller to sign at the first meeting, so you are not only authorized to talk to the lender, but you are authorized to look up the investor on the Fannie, Freddie or any other website.

What if Fannie or Freddie are not the investor, which is a frequent even for luxury housing. Many servicers will not tell you who the investor is, possibly because they do not want the investor to know how poorly they are processing your short sale request.

However, many servicers have rules that require them to furnish the investor’s information if the borrower/seller requests that information in writing. So, add that to your letter of authorization, i.e. the borrower requests the lender to furnish you with the name, address, phone number and contact person for the investor who owns this loan.

Some commentators say that another way you can find the investor is to look them up in MERS, the Mortgage Electronic Registration System. It allows borrowers to see which company manages and owns their loan. The site was made public as part of The Helping Families Save Their Home Act.  The claim is that the site will inform borrower’s when the ownership of their loan changes.  However, the only part of the site that is directed to homeowners allows you to check the servicer of your loan.  How to check the owner is well hidden.  So, if you can make this site work, please leave a comment on this post so we can share this service with everyone.

Why do you want this information? I was dealing with Bank of America/Countrywide on a California short sale. They were taking way too long to assign the request to a loss mitigation negotiator. Wells Fargo had the second loan on the property, and they had already assigned their short sale request to a negotiator, obtained a Broker Price Opinion (BPO) and were ready to negotiate a short payoff. Meanwhile, Bank of America/Countrwide is still waiting to get it to someone’s desk to order the BPO. On my weekly phone call, I made it clear to the “gatekeeper” that a written request to get the contact information for the private investor who owned the loan had been submitted.  She found a way to order the BPO immediately to speed up the process. In other words, when the servicer knows that their client, the investor, will be looking into how the short sale is being processed, the servicer wants to make it look better.

If you want to get more tools for negotiating in real estate, look at my book, Create A Great Deal, the Art of Real Estate Negotiating by going to http://www.CreateAGreatDeal.com

Obama Administration Plan to Improve Short Sales

Short Sales Will be Streamlined and Encouraged by the Treasury

On May 14th, 2009, the Making Home Affordable program created by the Obama administration was expanded by the Treasury Department to provide incentives for homeowners and lenders to engage in short sales. The program also encourages deeds in lieu of foreclosure. The Treasury Department unveiled this plan by calling these provisions Foreclosure Alternatives in the Making Home Affordable program.

To begin the process the lender evaluates the sellers to see if they qualify for the program, because the borrowers/sellers must meet the requirements of the Home Affordable Modification program. In other words, the borrowers who want to be sellers must meet the same standards applied to borrowers who are looking for loan modifications under the Making Home Affordable program, but are unable or unwilling to go through with the loan modification. Also, the lender will evaluate the property to see if it is reasonable that a sale will produce enough money to allow the lender to approve the short sale, i.e. will the net proceeds of a sale at the estimated sales price be an amount the lender would accept. A related step that the lender must take at the beginning of the process is to see if the condition of the title makes it plausible that all of the other loans and debts secured by the property will be able to be satisfied by a short sale. If the sale will produce enough money to satisfy the first loan, but not enough to take care of the second, third or fourth liens, then the property is not a good candidate for this program.

Sellers who complete a short sale can receive up to $1,500 when the sale closes. In nearly all short sales, the sellers get nothing out of the sale. With this program, they can use this money to pay some of their moving expenses when they finish the short sale. This helps the recurring problem that sellers need funds to be able to relocate when the home sells. This same $1,500 incentive payment applies to borrowers who give their lender a deed in lieu of foreclosure.

Loans have servicers and investors. The servicer collects the monthly payment and otherwise deals with the administration of the loan. The investor owns the loan and gets the net proceeds of each payment, after the servicer gets paid for its work. The servicer can get up to $1,000 for completing a short sale or accepting a deed in lieu of foreclosure. This is a decent incentive when you consider that the servicer gets a few cents from collecting each monthly payment.

In addition to these incentives, this expansion of the Making Home Affordable program creates a standard process to follow in a short sale. It creates timelines for the performance of the short sale, which is a welcome addition as they frequently drag on and on. The program also creates standard documents for use in short sales and deeds in lieu of foreclosure. The standard documents will include a Short Sale Agreement and an Offer Acceptance Letter. This standardization will make short sales easier to do, and the performance timelines should speed up the process. The Treasury update issued to explain this program says the Short Sale Agreement will “establish clear time frames for performance.”  I hope this means there will be clear time limits for a response from the lender to a proposed short sale contract. If so, this could greatly encourage buyers to purchase short sale properties. A quicker decision by the lender will make it easier for the buyer to wait for the short sale to close, as some short sale buyers get frustrated with the process and buy another property.

The lender has to allow the sellers/borrowers a minimum of 90 days and a maximum of a year to sell their property. The time will vary depending on local market conditions. The property to be sold must be listed with a real estate agent that has experience in selling properties in the neighborhood. So, it would be wise for more real estate agents to take short sale training classes.

The seller and the lender will spell out “reasonable and customary real estate commissions and selling costs” in the Short Sale Agreement according to the guidelines for this program. These selling costs and commissions will be paid at closing from the proceeds of the sale. One of the best parts of the entire initiative is that once an offer is received the lender cannot try to negotiate a lower commission to be paid to the real estate agents. In other words, the Short Sale Agreement establishes the rate of the commission and the lender cannot try to cut it during the negotiations on the Offer to Purchase in the short sale. This will encourage more real estate agents to do short sales.

The lender will establish both the property value and the minimum amount that the lender will accept. So, the lender will order an appraisal or a Broker Price Opinion (BPO) and use that to establish a reasonable sales price for the property. By the way, the appraisal or BPO will have to be current, as the program requires that they be done within 120 days of the Short Sale Agreement. This appraised value will be the basis for the lender’s decision of how much they will accept as the short payment of the balance due on the loan. Many lenders will accept 80% to 90% of the value established by the appraisal or BPO, which allows buyers to purchase the property at a favorable price.

This procedure of establishing the acceptable value of an offer will be a wonderful improvement to a short sale, as the seller will get this information at the beginning of the marketing effort. In short, the seller will know what offers will be acceptable to the lender. This should eliminate the “guess again” feature found in some current short sales, where the lender will occasionally turn down an offer without giving a counter offer or any guidance to the seller. The opposite should happen under the current program, i.e. the lender will instruct the seller concerning the price at which the property should be listed and also provide guidance on price reductions.

One of the biggest problems in short sales comes when the property has a first loan and additional junior liens. For example, many homes have a first loan and a home equity line of credit that is a second loan. There is some assistance from this program because the Treasury will contribute money to help pay off second loans and other junior liens. For every two dollars that the lender allows to be paid to the junior lien holder, the Treasury will put in an additional dollar, up to a limit of $1,000 from the Treasury. Since many lenders in first position will only allow a junior lien holder to get $3,000, this program should make it easier to pay off junior liens.

If the borrower is unable to sell the home within the time specified in the Short Sale Agreement, the lender may consider a deed in lieu of foreclosure, in which the borrower voluntarily transfers ownership of the property to the lender. However a deed in lieu of foreclosure only works if there is only one loan on the property because the lender will not want to accept the property burdened by the obligation to pay off the junior loans.

If you want to read all the details, the entire Treasury Update: Foreclosure Alternatives and Home Price Decline Protection Incentives is found at http://tinyurl.com/qlbn9m. or http://www.treas.gov/press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf

This program will be available until 2012. Let’s hope we are done with short sales long before that.

Can Buyers Speed Up a Short Sale Review?

Short Sale Review Has Limited Roles for Buyers, Buyer’s Agents & Well Meaning Fathers

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