First off, I want to make sure that everyone knows what a short sale is. When a homeowner owes more on their home than they can sell it for, they sometimes look at the option of completing a short sale. Essentially, a buyer is willing to pay less for the home than is needed to pay off the Seller’s mortgage. Through a short sale, the lender takes a lesser amount to release the mortgage and avoid a foreclosure. The Seller is affected by taking a large hit on their credit score.
For many people, including myself, the term “short sale” brings an automatic and uncontrollable feeling of frustration. I have been on both sides of the short sale process, both as the listing agent and as the buyers’ agent, and both times turned out to be ultimate tests of patience for me. As an example, the last company I completed a short sale with would not accept any sort of e-mail and required that all documents (which amount to an enormous amount of paperwork) be faxed to them. Then, when other departments work on the file, they require that those documents be faxed to wherever they are. I faxed some of the paperwork to the company over five times, due to them losing the documents or needing them at another location. I am by no means a technology wizard, but in this day and age, that seems ridiculous.
On a brighter note, there have been some recent changes to the way short sales are handled. Well, I should say there have been suggestions – not necessarily any changes in obligations by law. The January-February 2010 edition of Montana’s Realtor Digest contains an article written by Missoula, MT attorney James Bowditch regarding the short sales process. In general, the US Treasury Department released some standardized forms and guidelines with regard to the Home Affordable Foreclosure Alternatives Program (“HAFA”), which give incentives to lenders, loan servicers and borrowers. The idea behind the program is to improve the short sale process, in an effort to lessen foreclosures. While we don’t have the overwhelming numbers of short sales and foreclosures in Missoula, MT that have been reported in other areas, Missoula real estate has had its struggles.
So, what is different under HAFA?
- Sellers are able to obtain pre-approved terms concerning a short sale before listing the property.
- Loan servicers will send the Seller a short sale agreement after determining that the property and Seller qualify for a short sale.
- Within 10 days of receiving the proceeds from a short sale, the servicer must remove it’s first mortgage lien and the investor waives all rights for a deficiency judgment.
- There are certain eligibility requirements: the property must be the Seller’s principal residence; the lien must have originated on or before 1/1/09; the unpaid principal balance cannot exceed $729,750; the Seller’s total monthly payment must be more than 31% of their gross income; and the mortgage must be behind in payments, or it must be “reasonably foreseeable” that it will become delinquent.
- A qualified Seller will be entitled to up to $1,500 for moving expenses, paid to the Seller at closing by the loan servicer. Once the HAFA transaction is reported to the Treasury Dept., the loan servicer is reimbursed.
- Loan Servicers will also be paid $1,000 to cover administrative costs involved with the short sale.
- Investors can be paid up to $1,000 for allowing up to $3,000 in the short sale proceeds to be distributed to subordinate lien holders (so, every $3 an investor pays to release a subordinate lien, the investor will get $1 in reimbursement). In order to receive this reimbursement, the subordinate lien holders must release all future claims.
- Servicer may not require reduction in commission below that stated in the short sale agreement, however, the rate cannot exceed 6%.
- Requires that the listing agent allow the Seller to cancel the contract without paying a commission if the property goes to the mortgage insurer or mortgage holder.
- Sale must be an “arm’s length transaction” (meaning that the Seller cannot sell their property to a family member, close business associate, etc.).
- A buyer of a short sale may not sell the property for 90 days.
- The loan servicer will report that the loan was not paid in full, thereby affecting the Seller’s credit score.
HAFA was set up to shorten the length of time to complete a short sale. It is currently set to take effect on April 1, 2010 and run through Dec. 31, 2012. However, HAFA is not a program that lenders are required to follow. If they do not follow the guidelines of the program, though, they will not be eligible for the above-mentioned incentives.
I have also become aware that Bank of America now uses a company known as Equator, formerly REOTrans, to process all of its short sales. It is my understanding that this company provides a central place for all documentation and communication, in the hopes of streamlining the process. I have yet to get any direct feedback as to how the system has changed. However, I don’t believe it could get a whole lot worse than it was. I have heard that due to the overwhelming amount of short sales and foreclosures, Bank of America is still in the learning process of using this system.
It does seem like the large banks are taking a step in the right direction, in terms of organizing the process for short sales. I think there are many people who have run the other direction when they find out a home is involved in a short sale, and rightfully so. However, maybe things are headed down a different path for the coming months and years.