New Guidelines for Fannie Mae and Freddie Mac Short Sales

OVERVIEW

The Federal Housing Finance Agency has directed Fannie Mae and Freddie Mac to align existing short sales programs into one standard short sale program and issue clear guidelines to mortgage servicers.  Fannie Mae and Freddie Mac currently back nearly two-thirds of U.S. mortgages. In Orange County, depending upon the date of origination, these are loans below the former $729,750 threshold for a single-family home.  With these changes, Fannie Mae and Freddie Mac will allow homeowners with eligible hardships to sell their home in a short sale even if they are current on their loans.  Fannie Mae and Freddie Mac are making these changes to help more homeowners avoid foreclosure, keep homes occupied and help maintain stable communities.  The streamlined program rules will enable lenders and servicers to quickly and easily qualify eligible borrowers for a short sale.

HIGHLIGHTS – THE NEW GUIDELINES

Short Sale borrowers 90 days or more delinquent / credit score lower than 620 no longer can be required to provide hardship documentation.  To prevent second lien holders from stalling the short sale process, the GSEs will offer up to $6,000 to second trust deed holders.  Military personnel who are required to relocate will automatically be eligible for short sales even if they are current. They also won’t be obligated to contribute funds to pay for the remaining deficiency. Borrowers will not be eligible for a new mortgage backed by Fannie Mae or Freddie Mac for at least two years after a short sale.

When A Short Sale Fails Everyone

I don’t like to write about failure—mostly because it’s bad for business—but also because it’s not much fun.  Sometimes, however, it’s necessary.  Today is one of those days.

After 14 months of short sale negotiations on behalf of my buyer, with all indications that we were fully engaged with the lender and about to cross the finish line and open escrow, the property was sold at a trustee sale on the courthouse steps.  Most infuriatingly, the bank gave us no notice that the trustee sale date had not been extended (as had been done over many prior months by our negotiator) and that the trustee sale would take place.

I feel that my buyer at least deserved a shot at bidding on the property at the auction.  Why we were given no notice of the decision to foreclose while in the middle of extended short sale negotiations baffles me.  I first learned of the pending the sale via an email from our negotiator at about 11:40 a.m. while at a school assembly for my kids.  The sale was to take place at noon.  Neither I, nor my buyer, had our briefcase full of cash and helicopter ready, so we missed it.  Imagine that.

Why and how this happened is a mystery.  Since the bank can’t (or won’t) talk directly with me, I’ll never know the how or why.  I can’t think of a less transparent business than the behind the scenes mechanizations of the short sale process.  As listing and selling agents, we rarely are able to speak with bank employees, let alone meet with them.  They have no connection to the seller or the buyer either.  The bank personnel are accountable to themselves, but no one else apparently.  Naturally, they are not invested and see each transaction as a file they’d like to get off their desk.  Whether the result is an approved short sale or a foreclosure doesn’t seem to affect their ability to sleep at night.

The property in question was purchased by a third party for $28,000 more than our contract price with the Seller and short sale lender.  I can only guess that the bank looked at our contract date of September 2011 and made the following conclusions:  1) prices have gone up and we can do better at auction, 2) if we foreclose there will be no closing costs due, and 3) we won’t have to pay the 2nd their pennies on the dollar demand.  But I think I give them too much credit.

The original lender, Aurora, went into bankruptcy and the lien servicing was transferred to Nationstar, who seems equally inept.  The bank personnel are still woefully understaffed, undertrained, and overworked.  Their systems and procedures remain archaic and give low-level employees no authority to make decisions, thus the excruciatingly long turn time for even the simplest of matters.  Unless and until this changes, we can expect more of the same.

So, what can we do?  My buyer called me this week after catching his breath over the weekend and licking his wounds.  “How is this right?  Can they even do this?” he asked.  He could only conclude that somewhere there was gross incompetence.  The banks failed my buyer, their seller and lien holder, and the two agents involved.  In the end the bank made a choice to lose less money, rather than do the honorable thing and approve the short sale.  The third party who bought the property at auction made out just fine (and good for them).

I had no explanation for my client that provided any solace.  All I could say was sorry and direct him to this paragraph in the California Association of Realtors Short Sale Addendum that is a part of any short sale contract:

The last sentence states the harsh reality:  “Buyer, Seller and Brokers do not have control over whether Short Sale Lenders will consent to a short sale, or control over any act, omission, or decision by any Short Sale Lender in the short sale process.”  Have no illusions.  The bank is in charge and does not care about you.  For that, and for this failed transaction, I’m sorry.

 

 

 

How to Fight a Low Appraisal—The Review Process Can Work (If You Do Your Homework)

You know the saying “Cash is king?”  Well, it’s even truer in today’s appraisal environment.  Bank underwriters are still holding appraisers to a ridiculously tough standard in this economy, so treat a cash buyer nicely if you’re lucky enough to have one.  Even though our local market is improving, banks are reluctant to appraise homes at a value that sets a new high in a neighborhood.  We have recently seen banks give a low appraisal on a house that received multiple offers over its’ list price.  Their concern is not market forces or where a willing seller and buyer will agree.  They want to protect their investment, which often means a smaller loan or lower price to give the bank some cushion in the next downturn.

Thankfully, we are not powerless to respond.  Armed with current comparative sales (comps) information, we successfully fought a low appraisal this month and helped both the buyer and the seller where their interests’ aligned.  The seller was spared a large reduction in the purchase price that would have come straight out of their net, and the buyer received the larger loan amount and a smaller down payment he sought.  The relative difference in higher sales price and property taxes was worth it for the buyer who wanted to preserve cash for remodeling.  It was a win-win for all involved.

So, how did we do it?  First, if you’re choosing between more than one buyer, find out what type of lender they are using.  A buyer applying with a bank that plans to go with a government backed product will have much less control over the appraiser.  Private banks and direct lenders who fund and keep their own loans can give appraisers more latitude and tend to have greater freedom with guidelines.  Remember too, that a large down payment will give any lender increased confidence and perhaps result in less indirect pressure on an appraiser to scrutinize value.

Next, before you head down the path of fighting an appraisal make sure you have a good case.  All sellers want the highest price possible, but if there is a loan involved, the sales price must be justified by the comps.  Carefully review the comps used in your appraisal.  Ask the following questions:

  • Did the appraiser use the best comps?
  • Are the comps recent?
  • Were any supporting comps left out, and why?
  • Did the appraiser make proper adjustments for square footage, condition, location, etc.?
  • Were the pending sales comps closing estimates in line with what you know to be their eventual closing price?
  • Since the appraisal, have any of the pending comps closed escrow at values that support your sales price?

A good listing agent who is familiar with the sales in the neighborhood should be able to gather the evidence to present your case to the lender.  This due diligence is the first part of the equation.

The last part is careful, respectful communication with other listing agents, the buyer’s agent, the lender, and the appraiser, if necessary.  Poor communication can doom your cause.  Lashing out—even with proper cause—will result in the door to a review appraisal being slammed shut.  This hurts your transaction and ultimately results in lower property values in your neighborhood, which hurts everyone except the buyers trying to get into said neighborhood with the next listing.

If all three of the above are done well and your home was priced reasonably from the start, you stand a chance at prevailing with a low appraisal review.  Keep in mind that it involves a bank who is willing to work with you to get it right for all involved.