New guidelines are in the works to help relieve millions of Americans trapped by underwater mortgages, meaning they owe more than their homes are worth. The Federal Housing Finance Agency (FHFA) recently announced procedures have been established to make short sales a less grueling experience for borrowers deep in debt on a property. The actions are part of the Servicing Alignment Initiative, developed by Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac under FHFA direction. The guidelines will take effect November 1, 2012.
The FHFA anticipates the new regulations will make the short sale process simpler for those borrowers whose mortgage exceeds the value of the property and are experiencing significant financial problems.
Short Sale Obstacles
The short sale has long had a reputation for being a lengthy and complicated process for everyone, from the homeowner and the mortgage holder to the realtor and the buyer. The short sale process typically takes longer than a typical real estate transaction because the holders of the first and second mortgages (such as home equity loans) both have to agree to accept a purchase price much lower than the liens.
While the process can be complicated, short sales are often encouraged in a challenging market as they prevent more homes from reaching foreclosure status. Once a house is in foreclosure, it damages the borrower’s credit score as well as the real estate market.
The updated government plan will allow lenders to more easily qualify borrowers for short sales, regardless of whether they are delinquent on their loans. The plan also requires lenders to respond to short-sale offers within 30 days of receiving them.
In addition, the GSEs will have the authorization to allow up to a $6,000 cap on the amount of money the second mortgage holder can receive during a short sale. This will help limit the possible drawn-out negotiation between mortgage holders. Second lien holders, however, would still have the power to reject a short sale offer.
Under the new regulations, the two GSEs will also waive the right to go after a deficiency judgment in exchange for the borrower making a monetary contribution to the principal balance or signing a promissory note.
Members of the military who are required to relocate because of Permanent Change of Station orders will have the opportunity to expedite a short sale. In these cases, mortgage holders won’t be required to cover the difference between the sale price and the mortgage balance.
The new regulations will also help those homeowners who need to accelerate the process because they are experiencing severe financial hardship, such as loss of job, job relocation, divorce or a death in the family.
The Plan’s Effects
The National Association of Realtors announced its support of the new guidelines to alter eligibility criteria as well as simplify the short sale course because it may help stabilize future home values.
Since property short sales help limit the number of foreclosures that hit the market, the housing market is more likely to make a recovery if homes stay occupied.
The new GSE regulations can potentially reach a large number of homeowners in need of debt relief. Real estate data firm CoreLogic Inc. reported at the end of the first quarter of 2012 that, as the American housing market continued to struggle from a recession this past year, 11.4 million mortgaged residential properties were underwater.
While it is not yet known how many homeowners will qualify for assistance, about 4.6 million people with mortgages currently backed by Fannie Mae or Freddie Mac are trapped by homes worth less than the amount mortgaged. It is estimated 80 percent of those homeowners have not yet missed mortgage payments.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at email@example.com.
- CoreLogic (2012, July 12). CoreLogic Reports Negative Equity Decreases in First Quarter of 2012. Retrieved from http://www.corelogic.com/about-us/news/corelogic-reports-negative-equity-decreases-in-first-quarter-of-2012.aspx
- National Association of Realtors (2012, August 21). Realtors Applaud FHFA for Expanding Short Sale Eligibility to Help More Struggling Homeowners. Retrieved from http://www.realtor.org/news-releases/2012/08/realtors-applaud-fhfa-for-expanding-short-sale-eligibility-to-help-more-struggling-homeowners
- Swanson, J. (2012, April 21). GSEs to Allow Short Sales for Borrowers Who Are Current on Mortgage. Retrieved from http://www.mortgagenewsdaily.com/08212012_gses_short_sales.asp
- Zibel, A. (2012, August 21). 'Short Sales' to Get a Boost. Retrieved from http://online.wsj.com/article/SB10000872396390444443504577603552056318314.html