If you’re underwater and facing financial distress, Fannie Mae’s and Freddie Mac’s new short-sale-reform policies may provide the help you’ve been looking for.
Even if you are current on your mortgage payments, and never felt that you could qualify for a short sale and principal reduction, you could be in luck.
Short sales allow borrowers and lenders to avoid the crushing costs of foreclosure by bringing in a new purchaser for the house at what is normally a price well below the amount owed to the lender. In a successful sale, the distressed owner receives a write-down of the portion of the principal not covered by the new buyer’s price.
Starting November 1, 2012, owners whose loans have been purchased or guaranteed by Fannie or Freddie may qualify for a short sale if they fit key hardship criteria including:
- long-term disability;
- a change of employment that is more than 50 miles from the current home;
- a business failure;
- death of the primary or secondary wage earner; or
- a natural or man-made disaster.
In what could be a far-reaching change, Fannie and Freddie will allow borrowers who are current on their mortgage payments — not seriously delinquent as traditionally required — to qualify for short sales, provided they fit the hardship criteria.
Besides waiving the requirement that borrowers must be behind on their mortgage to qualify for a short sale, borrowers will also be eligible for streamlined processing of short sales, involving reduced documentation and much speedier resolutions than usual.
Under rules that took effect in June, loan servicers already are required to operate on fast timelines for short-sale requests. They are supposed to respond to borrower requests for short sales within 30 days of receipt of an offer by a purchaser, and must give applicants a final decision within 60 days of receipt of a completed short-sale package.
In the past, short sales often have been drawn out and contentious, sometimes taking nine months or more to close. They have also had a high rate of failure and cancellations, when buyers get frustrated and bail out of the transaction after waiting for banks and loan servicers to make decisions and process paperwork.
Banks that hold second mortgages or credit lines secured by the house have been another choke point. As lien holders, they can block the entire transaction if they feel they are not being properly compensated along with the first mortgage holder, and they have frequently blown up deals with their demands. Under the new Fannie-Freddie rules, second lien holders will be entitled to a maximum of $6,000 out of the proceeds of the sale.
The broadening of short sales to those who are current on their mortgage payments but encountering serious hardships could help huge numbers of underwater homeowners. Though the Federal Housing Finance Agency has no estimates of how many borrowers might be assisted by the change, its acting director, Edward J. DeMarco, has said that 4.63 million loans in Fannie’s and Freddie’s combined portfolios are underwater, and that about four-fifths of these are current on payments.
Additional key changes in Fannie and Freddie short sales:
•Members of the armed forces who receive permanent change-of-status orders and are underwater will be automatically eligible for short sales, even if they are current on their loan payments.
•In states where Fannie and Freddie have the legal right to pursue “deficiencies” when short-sale proceeds do not pay off the existing debt, they will waive that right and instead ask borrowers who have sufficient assets or income to make “cash contributions” or execute promissory notes to cover part of the shortfall.
To find out whether your loan is owned by Fannie or Freddie, visit either FannieMae.com/loanlookup or FreddieMac.com/corporate.
Attorney Jared Bellum is a contributing author to this blog.