Saturday, November 13, 2010

New Short Sales Rules for properties in Foreclosure


         The Treasury Department has adopted, effective April 5, 2010, a new program to facilitate short sales for residential property owners.  Prior to the new rules, homeowners who applied for short sales faced a long approval process, problems with second mortgage holders, lost buyers due to delays or extra costs, and frequent problems.  The new regulations are designed to address the perceived shortcomings by changing the rules for the participating lenders.

          In order to be eligible for the new Home Affordable Foreclosure Alternatives Program (HAFA), borrowers must first seek approval for a loan modification under the Home Affordable Modification Program (HAMP).  Borrowers who are unable to obtain a loan modification, are unwilling to accept the terms of the proposed modification, or if after approval are unable to stay in the program are potentially eligible for short sale under the new guidelines.

          Assuming a borrower is eligible the next step is the establishment of an acceptable sales price.  Prior to this program, most lenders would not establish a fixed sales price, but instead would wait until an actual offer was received to determine if the price was acceptable.  Under this new program, a borrower can submit an approved appraisal or broker’s price opinion.  Once this value is accepted by the bank, the property can be listed, marketed and sold for at or above that price without treatments of the sale as a short sale.

          Traditional short sales were often difficult to market and sell since many buyers were not willing to wait to see if their offer was acceptable.  Others often gave up due to the delays in approval.  By eliminating this issue, sales above the approved price can close in the normal course.

          One of the biggest complaints about the short sale process is the failure of lenders to timely respond to short sale offers.  Most short sale offers require lender approval within sixty days of submission.  In many cases lenders would fail to respond and buyers would walk from the contract.  The new rules require lenders to review and decide on properly submitted applications within ten days from the date of submission. 

          I do have a concern with this requirement solely due experience with lenders in the past.  If lenders had trouble approving short sales within sixty days, how can they fairly decide now in ten days unless they commit many more resources to this matter.  I am concerned that since it is easier to deny the application, many more short sales will be denied.  Only time will tell if this is an accurate statement.

          Once the short sale application is approved, borrowers will have a 120 day window in which to market and sell the property at or above the set price.  During this window, no foreclosure action will be filed, and any pending action will be stayed.

          Another key element of this program is debt forgiveness.  Over 30% of all homes in South Florida are underwater.  While most lenders have been forgiving debt after short sales, the lenders would not commit to that in writing, leaving many homeowners wondering whether or not they would face collection at a later date.  Under this program, debt forgiveness is guaranteed.  Homeowners must remember to properly address the debt forgiveness in their tax return to avoid a claim for income tax on the balance forgiven.

          In order to encourage defaulting borrowers to consider a short sale in lieu of foreclosure, the lenders will now permit the borrower to receive up to $1,500.00 from the sale closing proceeds to assist them in moving and relocating expenses.  Previously, in most short sales the borrower received no compensation at closing on the sale.

          Many homeowners have both a first and second mortgages (including equity lines and helocs).  This was often a large impediment to short sale approval, even though the second mortgage lender would generally be wiped out in foreclosure.  To encourage these second position lien holders to release their lien, they can be compensated up to $3,000.00 at closing from the first mortgage lender’s proceeds.

          Finally, to encourage lenders to approve short sales, the Treasury department will reimburse lenders up to $1,000.00 for each short sale completed under the new program.  In the past, loan servicers benefited from avoiding short sales and completing foreclosures because they were able to recover extra late charges and foreclosure expenses from the loan investors.  This payment is designed as a partial replacement for these lost funds.

          Overall, this new program is another small but encouraging development in the correction of the residential real estate market.  By creating a better mechanism for short sales, it is hoped that there will be less foreclosures and more short sales.  Foreclosures can lead to empty, blighted neighborhoods, while short sales help keep a community occupied with new buyers.  Unfortunately regulation rarely translates into real action unless the parties who support the regulations participate in good faith.  Many homeowners want to avoid short sales to stay longer in their home, and many others simply cannot find willing buyers.  Lenders and their servicers often avoid short sales because they do not want large sum of debt forgiveness on their books, especially when they have generally weak financial numbers.  However, if properly implemented this new program could lead to many more (and faster) turnaround for some borrowers and lenders.

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