In the first half of this article we ran through one possible short sale scenario. The goal was to establish a need for short sale regulation. The focus of this second part is to discuss the Treasury Departments imminent guidelines.
On April 5th the Treasury Department’s new Home Affordable Foreclosure Alternatives Program (HAFA) will take effect. Here is a brief rundown:
- HAFA does not apply to loans owned by Fannie Mae or Freddie Mac.
- Deadlines for each stage are established.
- Standardized forms are to be used.
- Pre-approval of sale terms will be agreed upon BEFORE listing the property.
- Servicers cannot require reductions in commissions that do not exceed six percent.
- Borrowers are released from future liability on the unpaid portion of the first mortgage debt.
- Financial incentives provided to the borrower, lender, and all subordinate lien holders.
Below are the details of each point:
1. HAFA Means Little to Fannie and Freddie
HAFA does not apply to Fannie or Freddie – these secondary market giants are said to be announcing their own guidelines soon.
2. HAFA Means Deadlines for Each Stage.
This is by far the most important regulation. Both the seller and prospective buyer need to know what they are getting themselves into right from the start. There are several deadlines from start to finish. The first of which includes a deadline on the borrower wishing to short sell.
- After the bank has informed the borrower of their options to avoid foreclosure, the borrower has 14 calendar days to respond verbally or in writing to their bank about which option they choose. If this deadline is not met, they are no longer protected by the new guidelines. Note to sellers, make your request in writing to create a paper trail!
- Once the borrower has requested a short sale, the loan servicer has 30 days to respond to the request.
- Once the servicer responds, the borrower has 14 calendar days from the date of the Short Sale Agreement (SSA) to sign and return the agreement to the servicer.
- The SSA gives the borrower 120 days to sell their property (extensions permitted up to one year).
- After receiving an offer, the borrower or their agent has three business days to submit a completed Request for Approval of Short Sale (RASS) to the servicer.
- The servicer will then have 10 business days to approve or disapprove a request for a short sale and advise the borrower.
- In regard to closing, the servicer may request a closing no sooner than 45 days from the date of the sales contract unless agreed to by the borrower.
- After closing, the servicer must release the first loan within ten business days (or sooner if required by local or state law) after receipt of the sales proceed.
Kudos go to the designers of this plan as it seems to me they have set realistic goals for each stage of the process. Giving time where time is needed will help all parties meet the deadlines and penalties imposed by the regulators of this program. My only question is when does the timer officially start for the steps involving notice, the day the seller informs the bank or the day the bank acknowledges receipt of the request? Often times it has taken a bank three weeks or more to even acknowledge receipt of my clients short sale packet.
3. HAFA Standardized Forms
The use of standardized forms will significantly improve the process as well because agents and bank staff will be able to familiarize themselves with the forms and the correct way to fill them out, allowing all steps to be done correctly on the first attempt. This will also avoid banks creating extra hoops for buyers to jump through.
4. HAFA Means Pre-approving Sale Terms Before Listing the property.
This step in my humble opinion is one of the most important of the lot. As it stands, banks do not disclose their bottom line to their borrowers until they have submitted a written offer. One of the major disconnects is that sellers and their agents having no idea what banks will accept; they list the property at a price that will hopefully result in multiple offers and drive the final price up. The unfortunate thing is that this can often lead to months of wasted time and the loss of a serious buyer. By informing the borrower which terms will be acceptable ahead of time, the home can be put on the market correctly from the start. This will also give buyers confidence that they will not be wasting their time by making an offer. Many buyers now avoid short sales altogether because of the huge risk that they may be wasting time and money.
5. HAFA Means Prohibiting Servicers From Requiring Reductions in Commissions That Don’t Exceed Six Percent.
As an agent engaging in a labor intensive short sale process, I am no stranger to the risks that I am taking when I agree to list a short sale. One of the most unfortunate risks is that even if I do successfully help guide the process through to completion, the bank reserves the right to drastically reduce my commission to whatever they see fit before approving the deal. Given that these types of sales are significantly more involved than most other types of listings, it is no surprise that many agents avoid listing short sales. This guideline it will give more agents the assurance needed that there is light at the end of the tunnel for this type of project.
6. HAFA Means No Future Liability on the Unpaid Portion of the First Mortgage Debt
Loan servicers must waive the right to seek deficiency judgements and can no longer require a promissory note for any deficiency. This is great for the seller, as prior to this a bank could have come after the seller years down the road seeking retribution for a short sold loan. There is also current legislation in the works that will release the seller from the tax implications of the short sale as they are currently required to pay income tax on the defaulted amount. For some people this would make a short sale an impossibility.
7. HAFA Means Financial Incentives Are Provided to All
Financial incentives provided by this legislation include: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; up to $1,000 matching funds for investors allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders. Any second or third lien holder will probably hate me for saying this, but I feel this part of the regulation is the least needed. We are so caught up in the “spend, spend, spend!” mentality that it is no surprise that it worked its way in. Having standardization in forms, deadlines, and a release of liability on the part of the borrower would have been enough, I feel, to move this sector of the housing market in the right direction. Throwing money at the problem is unnecessary and in some cases may cause financial strain on other programs that are in greater need of that money. The $1,500 for borrower relocation does tug at my heart strings a bit and as such, I cannot disagree that it would be helpful to a family with no money who now needs first month, last month, security deposit, etc. to get into their new apartment. However, for a bank that is forgiving $100,000 in a short sale process, what difference is an extra $1,000 going to make, seriously?
In summary, I feel this legislation is a huge step in the right direction. One unfortunate truth about these guidelines is that they are sorely needed now and by the time April 5th rolls around, it will be much too late for anyone who hopes to purchase a short sale in time to take advantage of the home buyer tax credit which will expire later on that month. Hopefully they will bolster the momentum created by the tax credit and launch us into a successful spring and summer sales season.
I encourage an open up the discussion to your opinions about these regulations; support or rebuttals to my opinions and also to any areas you feel were left out of the regulations that may still need some standardization.Email This Post To a Friend.