Training for Short Sales & Mortgage Loss Mitigation to Stop Foreclosure

Obama Administration Plan to Improve Short Sales

July 23, 2009 by  
Filed under Short Sales Stories

obama110Short 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.

Comments

14 Responses to “Obama Administration Plan to Improve Short Sales”
  1. Roger Sharp says:

    Did the Obama administartion ever issue the standardized short sale agreement? How can I get my hands on one?

    • Tim Burrell says:

      They have not. There are draft proposals that I have copies of, but I am not supposed to release them because they are a work in progress. Fannie Mae is proposing to have its own short sale agreement coming out soon, after they do a pilot program in Los Angeles to test it out. Thanks for asking. Tim

  2. Lori says:

    Funny I had a decent short sale offer, only $10,000 short of what I owned. Bank sent bpo, that came back way to high, higher than any comp in neighborhood. My realtor even sent them recent comps. But, no lost buyers and now they are offering a deed in lieu!! Why didn’t they just accept the short sale instead of me ruining my credit even more. If it wasn’t for the apppraisal fraud to begin with when I refinanced all this would not have happened, so they screwed me again!!

    • Tim Burrell says:

      I am so sorry that it did not work out for you. When you get a bad appraisal, the system does not work. When the appraisal is unreasonably high, it is hard to convince the people who ordered it that it is flawed. So, I go to the investor or the guarantor with an easy to understand analysis of the market value of the house and try to convince them to overturn the analysis that was ordered by the servicer. Poor price opinions have been such a problem in California that the legislature enacted a law prohibiting someone from coming in with too high a value of the house to ruin the short sale, so that they could get the listing after the bank foreclosed. In your case, the deed in lieu helps no one, although it is a negotiating opportunity to get several months of free rent and an agreement that they are taking the home in full settlement of the entire debt (with no debt relief for tax purposes).

      • Lori says:

        Thank you for your answer and concerns. I live in Florida and there seem to no rules to anything! I have been fighting with everyone already about the original appraisal when I purchased the home, I was upside down from that point. And with a large sum down, I have lost everything. Thank you again for listening.

        Lori

  3. Andrea says:

    Hello! Thanks for this great information. How does one go about getting the $1500 for the homeowner doing the shortsale? Did this go through with the Feds? Is there a resource you can point me to?
    Thanks! Andrea

    • Tim Burrell says:

      You need your short sale to be processed under a system that allows the $1,500. If you are part of an FHA short sale, the HUD Preforeclosure Sales Program allows for a payment to the seller that varies depending on when the sale closes. The new HAFA program that is part of Making Home Affordable allows the $1,500 payment, but most banks have not implemented that program, as they have until April 2010 to do so. For the regulations on this program look at https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf . Good luck.

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  8. Mike Dollins says:

    I did a short sell, and now I have a bad CAIVRS report on me. I can not get a VA loan for three years. My short sell was a FHA loan, & I am being reported as a foreclosure. I found out the hard way when I went to get a new VA loan,& was turned down.

    • Tim Burrell says:

      The short sale should be reported as something like settled for less than full value, or paid in full for less than full value. There is no specific designation for short sales but it should not be the same as a foreclosure

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