SHORT SALE PROCESS TO BE STREAMLINED! But Perhaps Not Completely All Smooth Sailing!
FED PLAN COULD REDUCE APPROVAL TIMES, INCENTIVIZE HOMEOWNERS, SECOND LIEN HOLDERS!
Whether you are a Home Buyer, Distressed Home Seller, or Real Estate Practitioner, if you have been exposed to the Short Sale Process, you know it is often fraught with confusion, frustration, and lengthy time delays.
Under the new Home Affordable Foreclosure Alternatives Program, however, just finalized by the U.S. Treasury Department, the process could get a bit easier, and conclude quicker. However, the road to a smooth short sale for every buyer, seller, and lien holder may not yet be so smoothly paved.
In a nutshell, a Short Sale occurs when the seller's lender agrees to accept less than the full amount owed on a distressed home seller's mortgage. Most in the Real Estate Business consider it the most attractive alternative to home foreclosure.
To date, however, the frustration and time delays have resulted from a lengthy and unstandardized approval process from each lender. Some lenders have systems in place to approve and close a short sale within a comparatively-short six weeks or so. For others, especially larger, national lenders, the process can drag on for many months.
Often times, the buyer contemplating short sale purchase will grow weary waiting for lender approval, and moves on to a conventional sale, as many are available, priced competitively, in an oversupplied real estate market.
Sellers and Real Estate Practitioners often find the short sale approval process not only time consuming, but very painful. Especially with larger banks, customer service is overtaxed, and poor. Files have to be resubmitted for approval multiple times. And completed paperwork need often be revised due to many lenders extended approval time frames.
Under the new, streamlined short sale approval process, originally announced last May, but only finalized on November 30th, forms and approval times for all participating banks will be standardized.
Here are the highlights, as summarized by the National Association of Realtors via their website -
- the HAFA Program would only apply to those whose subject property is a principal residence. No second homes or investment properties would qualify.
- the primary mortgage must have originated before January 1, 2009, and the mortgage is now either in arrears, or, in the judgment of the lender, likely to fall into default.
- the total house payment for the affected property is in excess of 31% of the borrower's monthly gross income.
- the Unpaid Mortgage Balance is no more than $729,750.
Under the program, the participating lender would have to advise their borrowers in distress - either those who have inquired about mortgage loan modification, or asked about a short sale - as to their option to sell short early in the process.
Lenders would send the borrowers a Short Sale Agreement, which would need to be returned to the lender within 14 days. This agreement would give the borrowers 120 days to sell their home, with extensions possible up to a maximum of 12 months. Presently, the short sale process would not commence for most lenders until a written Offer to Purchase is in hand.
The lender would have 10 business days to approve any contract for sale after it is submitted to the lender. Currently, there is not such guideline, and our Chicago Real Estate Team has often waited, without response or communication, for weeks or months on whether or not the contract will be approved.
The holder of the primary mortgage loan would have to release their lien on the property promptly after closing, and must waive their rights to a deficiency judgment from any forgiven indebtedness.
Under the new program, holders of secondary liens would receive $3,000 from the Fed as an incentive to release their often-smaller loans. Not releasing these loans can stall any short sale, and often do. Normally, however, if the secondary lien holders refuse to agree to release their lien, their due proceeds gets wiped out should a foreclosure be completed.
Loan servicers might also qualify for a separate $1,000 federal incentive. Further, the sellers themselves would receive a $1,500 incentive to cover their moving expenses, payable when they vacate the property and leave it in clean condition.
As for the Real Estate Practitioners who service these short sales, new rules that any real estate fees or commissions not be cut lower than what is stated in the Listing Agreement, so long as they are 6% or less. Neither the buyer nor the seller can profit from the transaction in any way - the seller has to walk out neutral. The buyer, if a licensed Real Estate Professional, cannot receive any commission payout at closing, or subsequently.
Foreclosure may be initiated, but not completed, during the Short Sale Process.
Any pitfalls?
Many!
The program is strictly voluntary for lenders, but will be required of any lender participating in the Home Affordable Mortgage Program no later than April 5, 2010.
Some fear that secondary lien holders may play hardball and not accept the usually-reduced settlement amount offered by the primary lender. Even with the Fed $3,000 incentive to secondary lien holders, many stand to lose thousands of dollars should the short sale be successfully negotiated.
And, finally, it is unclear how this program will actually work in practice. The Home Affordable Mortgage Program itself, begun early in 2009, has only gotten a small number of qualified, distressed borrowers through the application process for Mortgage Loan Modification.
The question remains - is the new HAFA Program really Short Sale Process Reform? Or, just more lip service and opportunity for a sound bite or two around Washington?
Time will tell - but at least it represents a step in the right direction!
DEAN MOSS & DEAN'S TEAM CHICAGO
