Owe more than your house is worth? I don't be locked in. Do a short sale!
I noticed an article through Reuters reporting, Treasury sets guidance to simplify “short sales”. The HAMP website released “Supplemental Directive 09-09” which is the new guidelines for servicers doing short sales (HAFA details here – HAFA means Home Affordable Foreclosure Alternatives).
Short sale agents and distressed home sellers have been waiting for these guidelines with bated breath for some time and finally they are here. These guidelines are fantastic news not only for upside down sellers but for Americans as a whole. I have written several blog posts on this blog about how lenders have been purposely following policies that are allowing homes to foreclose. Short sales provide hugely a beneficial solution to borrowers and investors however loan servicers that manage large loan portfolios have had little incentive to actually take proactive action to process short sales. With “Supplemental Directive 09-09” all of this will change, or so we hope!
If you don’t want to spend half a day sifting through the forty three page HAFA short sale directive here is a quick summary of the benefits:
No frustration here. Short sales will be done quickly... or so they say!
- Lenders will be preapproving short sales- What does this mean to you? A big reason short sales fail is that lenders won’t work with agents to tell them what price they should list the property at. Then when a real estate agent does get a great offer the lender takes 90 to 180 days to evaluate the offer and during that time the buyer walks and the property goes down in value another 20 percent. This won’t apparently won’t happen with this program implemented.
- Lenders must fully release borrowers- Many sellers biggest fear is that their lenders will come after them for the deficiency left over after a short sale. As a short sale negotiation expert I always attempt to make sure that there are no ways the lender can come back and collect the deficiency on my client. However there are some lenders that have standard non negotiable acceptance letters that they refuse to change that specifically reserve the right for further collection on that amount. Some lenders will require the borrower sign a promissory note for that difference. You won’t have to worry about any of these big fears.
- No more out of pocket demands from second lein holders- Some lien holders have in the past asked for sellers to bring cash to close. Now it will be NADA!
- 3 grand is maximum for 2nds- 2nd lien holders and 1st lien holders have traditionally fought each other about how much the 2nd mortgage should get. I have seen these battles cause short sales to turned down. Now there is one less barrier to your home being sold on a short sale.
- borrowers can be paid up to 1500- That is right! Sell your house and you get paid right out of closing to as a reimbursement for your moving expenses!
- response in 10 days- Of all the requirements… THIS IS THE BIG ONE! A 10 days response will make short sales feel almost like an ordinary sale… except better because if you are selling on a short sale you have more freedom to price your property properly!
- no cutting commission- Sellers typically don’t worry about an agents commission. However a well paid agent can afford to spend the time he or she needs to really take care of you.
So who gets to take advantage of this program? The following conditions must be met:
- Primary residence- The short sale must be the borrower primary residence. This could be bad news for investors trying to get rid of their upside down portfolio as servicers will be rushing to meet the requirements for home owner occupants and investors may get ignored. However I have feeling that what this will serve to do is to get servicers moving with a speedy processes that end up benefiting the investor looking to short sale his rental as well.
- Mortgage must be 1st lien and older than January 2nd 2009- So you folks that are buying right now know that this program might not apply to you.
- Verified hardship- The mortgage must be delinquent or default must be unavoidable in the near future
- Balance limit- The total delinquent balance must be equal or less than $729,750.
- DTI > than 31 percent gross income- That is right… your debt to income ratio (mortgage payment to total gross income) must be more than your 31 percent. If that is not the case then the logic is that you should make the payments and keep your home through the HAMP modification program. In fact before you participate in the HAFA program you need to be evaluated for eligibility in the HAMP modification program to see if you can keep your home. However according to my reading of the program just because you could qualify to keep your home under the HAMP program does not mean that you cannot still participate in HAFA and short sale your home.
Time will tell how successful these directives are. If your mortgage is a Fannie Mae or Freddie Mac mortgage then this program will available to you. For some servicers it will be optional for them to participate in this program however it may make financial sense for them to do so. Maybe not to because a lender may not feel the extra $1000 they get will overcome the extra costs and regulations associated with the program.
The effective date for the directive is April 5, 2010 however servicers can start earlier if they comply with all the requirements for reporting.
Short Sale Santa
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Andy Morris is a short sale negotiations expert. Call him 888-4-STOP-IT to see if you qualify for a short sale with your lender and make use of his nationwide network of short sale agents.
Ohio Short Sale Expert | Stop Foreclosure Ohio | Short sale Cleveland
{ 19 comments… read them below or add one }
This is great information. As a investor will I still be able to do these short sales or will I need some kind of certification.
Thanks!
According to this directive a investor who is completely arms length is free to make an offer on a short sale property that is allready listed by a real estate agent. No certification needed. The way the short sale agreement is written it will make it very hard for “option and resale investors” or short sale flippers. Many of these investors will get an option on a short sale property, record it to cloud title, find a buyer to buy it from them and negotiate lower and then only close the property themselves when their end buyer they are selling to it has brought the money and is ready to close. This is very common in the industry although frowned upon by most lenders and politicians. The following clause is in the short sale agreement required to be signed by all sellers “Under penalty of perjury, you certify that:
1. the sale of the property is an “arm’s‐length” transaction, between parties who are unrelated and
unaffiliated by family, marriage, or commercial enterprise;
2. there are no agreements or understandings between you and the Buyer that you will remain in the
property as a tenant or later obtain title or ownership of the property;
3. neither you nor the Buyer will receive any funds or commissions from the sale of the property; and
4. there are no agreements or offers relating to the sale or subsequent sale of the property that have not
been disclosed to the Servicer.”
Also the agreement of a short sale can be terminated if:
“You or your broker fails to act in good faith in closing on the sale of the property or otherwise fails to abide by the terms of this Request.” One example of such lack of good faith would be that a broker directs all short sale sellers to a single investor and avoids exposing it to the open market thereby artificially lowering the price and causing the lender to believe that it is worth less than what it is.
Also quoted from the directive: “Any buyer of your property must agree to not sell the home within 90 calendar days of the date it is sold by you.” This effectively will remove quick flip investors from the mix.
Andy,
Surely you jest?
If the contract is written the right way investors will most certainly still be able to perform back to back closings.
Your line….4. there are no agreements or offers relating to the sale or subsequent sale of the property that have not
been disclosed to the Servicer.”……….
is the key to open the lock on that door. It’s all about disclosure and transparency.
and this line here…..
“You or your broker fails to act in good faith in closing on the sale of the property or otherwise fails to abide by the terms of this Request.” One example of such lack of good faith would be that a broker directs all short sale sellers to a single investor and avoids exposing it to the open market thereby artificially lowering the price and causing the lender to believe that it is worth less than what it is………….. more hogwash from our illustrius politicians……..first of all what if there is no broker, no one can force you to list your house with a licensed agent….(consumer and anti-trust laws)……… second of all and more importantly, the lender(s) does their own independent valuation of each property they have on their books, most of them use at least 3 -4 different sources (which is also why the ten day rule is ludicrous), they know what the value is and they approve short sales based on their own interior accounting systems.
Any knowledgeable attorney will tell you there is nothing illegal about doing back to back closings as long as you disclose what you are doing and the bank approves a short payoff, you will still be free to do as agreed. A contract is a contract, it can’t be broken and will be upheld in a court of law.
Now, if you are fraudulent in any way, then you will have some problems and certainly should be worried but that is no different than the way it is now.
AND…..Lenders are approving short sales on 2nd homes, development projects and commercial properties all day long……this new bill is just more political fluff that was thrown together without much thought to appease the masses.
How about this fantastic investment idea for you and your followers………Commercial real estate cramdown opportunities will NOT be affected by any of this “legislation”. Same lenders…..bigger financial burdens on their books……no public, political or Realtor negativity…..and much larger spreads of equity opportunity.
You’ve just been schooled….now go implement what you’ve been taught and help us get out of this mess…..
BTW – there is no charge but i do take donations…lol
Hi Kevin,
I thought your comment deserved a more in depth answer so I made it into a post and put it here… http://www.wannanetwork.com/2010/01/02/will-supplemental-directive-09-09-eliminate-short-sale-investor-flips-quickturns/ Needless to say appreciate your comments but in know way do I feel “schooled”…
Is it not true that if a bank paid back the tarp $ they do not have to comply with the new SS regs and didn’t Wells Fargo, Citibank, Chase, Bank of America , comprising 85% of all short sales pay it back already?
Hey Karen,
They aren’t regs. It is actually called a supplemental directive. However they only apply if a bank wants to be in the program. There actually isn’t a huge incentive to be in many situations because banks will have to waive all rights to deficiency and many banks are kind of liking the idea of being able to wait a couple years and then come back and get you when you are back on your feet.
Andy
I’m curious if the new provision for lender’s releasing borrowers will only apply to short sales going forward? Or, will foreclosures and short sales in the past also be released?
Well HAFA is a directive for new short sales and is only for lenders that choose to be in the program and for applicable short sales and applicable investors. It doesn’t apply to old ones which are not HAFA short sales. It could be that congress does write a law about defficiencies on short sales on foreclosure but currently there is no federal requirement for foregiveness of foreclosure related deficiency.
what about if i am the buyer and i have been trying to buy this house (a short sale) for over a year. What exactly will this do for me? Is this going to speed up the process?
probably not… but i am not sure… think most of the HAFA short sales will not be conversions from previously started short sales… but that may be my negativity.
Great article. I’m confused though on a few things… I thought all of these government programs were voluntary on the part of the banks? How is the government going to force a private company that happens to hold a 2nd lien position on a home to take $3k (thereby potentially losing ten’s of thousands of dollars)? It takes some banks longer than 10 days to respond to offers on homes they own and have already valued. How is ten days a reasonable amount of time for them to do their due diligence on the both the seller (to make sure they are worthy of a short sale) and on the house (to make sure they are getting fair market value)?
taylor,
only two bank have signed up for the junior lien HAFA program… Bank of America and one other one which I forgot. I think there are some ways they will be forced into as even the banks that didn’t take or have paid back bail out funds are still exist because of lots of free money that comes from the government.
i agree though it doesn’t seem like there is much incentive here.
It’s my understanding that the HAFA guidelines are only for NON freddie/fannie loans???
that is correct…
I have some questions about primary residence. Does the captial gain tax primary residence 2 out of the last 5 years count for the short sell as primary residence?
Info Deficiency update
Hi Andy,
We are the buyer. We submitted the offer to the seller agent on Apr 26, and the Seller accept our offer and signed purchase agreement two days later.
And now I wonder how long will it take to get bank approved? the lender is chase bank. the house is bought 2004, and the mortgage is around 200,000. I saw there is a new short sale rules start on Apr 5, is that mean each bank need to response the offer within 10 days, at least need to let us know whether they will accept the offer or not.
Please advice !
Thanks!
Best,
SEAN
I am in the same situation as SEAN, we just got an offer through the seller and to the bank and are now wondering how long we have to wait given the new 10 day law is in effect. What recourse do we have if B of A takes longer then 10 days?
Thanks!
Jamie
i still don’t see the 10 days happening. bank of america even on hafa sales is closer to a month… recourse is to go to treasurey department and complain…