Short Sales and Short Tempers
Go ahead… ask any Realtor or Seller who has gone through a short-sale and they’ll tell you that it can and usually is a nightmare. The lenders have little ambition to work with the Borrower and the Realtors only have the power of pestering the Lender until they finally agree to accept the short-sale. I’ve been traveling all over Virginia and Maryland training Realtors on how to best help their clients, but even with those tools we’re still at the mercy of the Lender.
Enter: The Home Affordable Foreclosure Alternatives Program
On November 30th a Supplemental Directive was published by the Treasury Department that created a program incentivizing Lenders (Servicers) and Borrowers. The Press Release does a good job of giving an overview but the real information is contained in the very lengthy Directive. This program address’ both short-sales and Deed in Lieu of Foreclosures, but I am only writing about the short-sale part in this post.
The HAMP program offers incentives for the Borrower, Servicer and Investor should the Short Sale (or Deed in Lieu of Foreclosure) be processed in accordance to their guidelines. The HAMP program is for those programs that are not already Freddie of Fannie Mac backed loans. Freddie and Fannie already have their own guidelines. Even though this program does not effect Fannie Mae, they have been selected as the “Financial Agent for the United States” to administer this program.
The program has some fantastic benefits, but (here’s the kicker) the incentive to use this program seems to be nominal. According to page 12 of the Directive “The servicer will be paid $1,000 to cover administrative and processing costs for the Short Sale….” and the investor will get “…a maximum of $1,000 for allowing a total of up to $3,000 in short-sale proceeds to be distributed to subordinate lien holder, or for allowing payment of up to $3,000 in subordinate lien holders. This reimbursement will be earned on a one a one-for three- matching basis. For each three dollars an investor pays to secure release of a subordinate lien, the investor will be entitled to one dollar of reimbursement”.
The real benefit is to the borrow who gets $1,500 if they have vacated the house at the time of closing the short-sale. This is labeled a “relocation assistance payment”.
The program begins April 5, 2010 (but some applications can be processed prior) and sunsets December 15, 2012.
What’s the Dets?
Ok, so lets say that the Servicer and the Investor decide that the reimbursement above IS enough money to justify the program requirements, here are some highlights of the requirements:
Benefits for the Realtor and Buyer
- Borrower to receive pre-approved short sale terms prior to the property listing
- Requires that Borrowers be fully released from future liability for the debt
- Provides the aforementioned financial incentives to all parties
- Servicer must consider reasonable and customary real estate transaction costs for the community
- 120 Days to sell the home with pre-listing approved terms
- Home MUST be listed with a licensed real estate professional who is regularly doing business in the community where the property is located. (I love that one)
Servicer Requirements
- Short-sale must be an arm’s length transaction
- Servicer must proactively notify the borrower in writing of the availability of this program
- The Servicer must independently assess the current value of the property.
- Must establish minimum acceptable net proceeds before approving borrower for the program
- May NOT complete a foreclosure sale while:
- Determining the Borrower’s eligibility
- While awaiting the return of the request
- During the term of the term of executed short-sale approval
- Pending transfer with an approved contract
Other Considerations
- Buyer of the short-sale must agree to not attempt to sell the property for 90 days after purchase
- Notice must be given to Borrower that there may be negative credit repercussions, etc…
- Items needed to request a Short Sale Approval
- Copy of executed sales contract and all addendums (not just the docs the agents want the lender to see)
- Buyers Pre-Approval Documentation
- Status of all subordinate liens
Cause for Termination of Approval
- Borrower’s financial situation improves
- Listing Broker or Borrower fail to act in good faith in listing, marketing and closing the sale
- Significant change occurs in the property condition or value
- Evidence of fraud
- Borrower files for bankruptcy
There are also timelines for processing of the short-sale. The Borrower has three days to get the contract to the Servicer after ratification. The Servicer than has ten days to approve the “Request for Short Sale Approval” so long as all required documents are in.
My Take
Please read the source documents carefully, because this post is just to outline what I found interesting and how I perceived it’s contents.
Borrowers and their agents will need to start asking their Lender if the lender offers this program. I don’t imagine many will, but it’s still good to ask. If you’re a Seller considering selling, make sure you consult and hire a well trained Realtor. These are doable but sometimes difficult transactions. Jennifer and I have successfully closed short-sales and found that each one was unique and different. I’m sure we’ll be writing about these programs more in the future.
I’m hopeful that some of the movement we’ve seen at a federal level will eventually will become law. The sluggish way that some lenders handle these transactions are very harmful to the Borrower.
