New Short Sales Program Nov 1st…

Fannie Mae and Freddie Mac (collectively Frannie) are requiring mortgage servicers to complete short sales under one uniform approval process, called the Standard Short Sale/HAFA IIFrannie expects this streamlined process will make short sales uniform, faster, easier and clearer. Under this new program:

  • homeowners current on their mortgage payments will be eligible for a short sale if they meet other hardship criteria;
  • Frannie will wave deficiency collection in exchange for a “cash contribution” from borrowers meeting specific financial guidelines (contribution not to exceed 20% of the borrower’s reserve funds or other assets);
  • members of the military who are being relocated will be automatically eligible for the program; and
  • Frannie will offer up to $6,000 to second lien holders to speed the short sale.

Homeowners with Frannie-held mortgages may be eligible for a short sale if they meet one of the program’s hardship criteria, including:

  • death of a borrower or co-borrower;
  • divorce;
  • unemployment;
  • disability; or
  • relocation for a job.

The new guidelines are effective November 1, 2012.

first tuesday Insight

Frannie’s newly broadened eligibility requirement for a short sale ought to be a gift to underwater homeowners current on their payments. It ought to stimulate the housing market by leaving homeowners’ credit intact, allowing the pool of employed homebuyers to remain undiminished while freeing-up more properties for sale. No penance necessary for underwater homeowners before entering into a new home loan agreement. Right?

Related article:

July Letter to the Editor: The credit score damage: foreclosure vs. shortsale

Wrong. Recent reports on the effect of the standardized HAFA II short sale on non-delinquent homeowner credit reveal that delinquent and non-delinquent homeowners who participate in this program will be given the same treatment by credit reporters. No NOD? No matter; a short sale is a short sale due to a discounted payoff of the mortgage, and that at the FICO level remains an indicator of a high-risk borrower. The homeowner did not pay the lender as agreed to in the note and trust deed — period.

Related article:

L.A. Times: Fannie-Freddie short-sale program may hurt sellers’ credit scores

Sincere agents will counsel their short sellers of potential damage these transactions will do to credit scores. To best defend their sellers, agents must ensure the loan payoff agreement on a short sale includes a provision that the lender will report the payoff to the credit agencies as “paid as agreed.” Without written lender consent in the form of a “paid as agreed provision” in the final payoff documents, the seller’s credit will be destroyed – by systemic design.

Even though this credit score penalty limits the incentive for homeowners to rid themselves of their negative equity asset, many homeowners will still choose to short sell without sensing they are “guilty” of a default if the option is given to them. All this meansFrannie’s new program will likely increase the number of short sales transactions.

Though not ideal, Frannie-encouraged short sales will allow more underwater homeowners to escape their negative equity. That, most importantly for the family, will free them of excessive payments for housing and allow them a fresh start toward a higher standard-of-living, which has suffered in this Lesser Depression.

The MLS result: more homes for sale in the housing market — and more fees for agents.

Some things will remain unchanged in this matrix. Demand will be reduced as the short-sale seller exits homeownership, unable to soon purchase a new home funded by a purchase-assist mortgage. They will be removed from the market, no differently than in the past, pre-Frannie hype. However, by accelerating the process of moving homeowners out of their negative equity properties, the process of recovery will also be hastened. In the meantime, the rental market can thank Frannie for growing the population of tenants.

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