Does the Seller Need to Be Delinquent?
Does the Seller Need to Be Behind on Mortgage Payments?
Years ago, I gave a presentation on Short Sales to the CyberStars, a great group of high tech Realtors. One of the members of the audience said, ?Of course, to start a short sale, the seller has to be behind on their payments.? This is a common thought. In general, that is not correct. The majority of the short sales I have done involve sellers with high integrity who will make their payments if there is any way to do so. So, the majority of my short sales involve a mortgage where the payments are current.
There are exceptions to this rule. There are some servicer guidelines that state the borrower/seller has to be delinquent in the payments in order to qualify for a short sale. That makes you wonder about the wisdom of that rule.
A short sale is supposed to give a borrower a way out of a bad situation that does less damage to a credit report that a foreclosure. If the borrower is willing to ignore the obligations, the lender will foreclose. Why require the borrowers to damage their credit by missing payments in addition to the damage done by the reporting of the short sale.
In one situation, I understand the reason for the rule. Fannie Mae has many of its loans in Mortgage Backed Security (MBS) pools. In order to get the loan out of the pool and do a short sale, the loan has to be non-performing. The easiest way to be non-performing is to fail to make a monthly payment. So, many loans where Fannie Mae is the investor that owns the loan require the borrower to be one month behind on the payments.
If you understand the mechanics of the review process, you can minimize the damage to the seller. The point in time that the loan needs to be delinquent is when it is approved by Fannie Mae. It does not need to be delinquent from the beginning of the review process. If the servicer tells you otherwise, contact Fannie Mae and ask to talk to a level two supervisor.
So, do not have your seller miss a payment until the short sale is ready to submit to Fannie Mae for its approval as the investor. The payments can be made during all the time you are waiting for your package to be placed on a negotiator?s desk and most the time for the review by the negotiator. Just be 30 days late when it is on the desk of the Fannie Mae representative.
Freddie Mac Home Affordable Foreclosure Alternative (HAFA) Short Sales require the borrower (seller) to be delinquent in the payments by 60 days. The only logic I can see in this rule is they want to see that the seller is really desperate as shown by the inability to make the payments.
In North Carolina, the foreclosure proceedings can be started when the borrower is 60 days late. So, you apply for a Freddie Mac HAFA Short Sale when the foreclosure proceedings start. Freddie Mac regulations allow the servicer to take 45 days to review the HAFA application, and that time limit is frequently exceeded. The HAFA regulations say the actual foreclosure sale cannot occur while the servicer is considering the HAFA application, but the foreclosure department can proceed with all the other steps leading to the sale. If the HAFA application is denied, then the foreclosure can take place.
In order to be considered for a Freddie Mac Short Sale, you have to put the seller right on the edge of the foreclosure sale. That puts the Realtor in the position of suggesting that the sellers allow themselves to be dangled over the edge of a cliff with the hope that they will be rescued in the nick of time.
Then, there are the situations where the servicer incorrectly advises the seller that they have to be behind on their payments. I had a seller who applied for a HAFA short sale where the loan was owned by Fannie Mae. The servicer said that the borrower had to be 60 days delinquent. I protested that was a Freddie Mac rule, not a Fannie Mae rule. The servicer did not care and closed the file. The level two supervisors at Fannie Mae confirmed that I was correct, but the file was already closed.
Bank of America re-opened the file and I had to submit all the information through Equator again. Bank of America?s procedure requires the borrower to call Bank of America part way through the HAFA review. When the seller made the call, the Bank of America representative told her first she qualified for HAFA, then checked and said she did not, then checked again and said she did, then checked again with the only accurate statement that she was unsure whether she qualified or not. When the seller called back the next day to get some clarification, the Bank of America representative said she would take her information to consider her for their Cooperative Short Sale before passing her on to a representative who could give her a clear answer on her HAFA qualifications. When she was connected to the HAFA representative, she was told that since she applied for the Cooperative Short Sale,that terminated her HAFA application. Right now, we are waiting for the Cooperative Short Sale package that is being snail mailed to see if its terms will give us what we need.
In short, it may not matter whether the regulations require the seller to be delinquent. If the servicer thinks they need to be delinquent, that is enough to result in the file being closed and the short sale delayed.
As a matter of policy, sellers should not be required to be delinquent on their loans. The sellers who takes a second or third job to keep the mortgage payments current should not be penalized while a seller who does nothing is rewarded. My understanding of the pillars of the American economy is that the people who honor their commitments and make their payments should be rewarded, not punished.