The Federal Housing Finance Agency said Tuesday that it has adopted rules that will "enable lenders and servicers to quickly and easily qualify eligible borrowers for a short sale." The guidelines, which take effect Nov. 1, apply only to underwater mortgages guaranteed by Fannie Mae or Freddie Mac.
In a short sale, a home is sold for less than the amount owed and the lender generally agrees to forgive the remaining balance.
Today, Fannie and Freddie approve short sales only for borrowers who are delinquent on their payments. Under the new rules, Fannie and Freddie will approve short sales for borrowers who can document specified hardships: the death of a borrower or co-borrower, divorce or legal separation, illness or disability, or a move of more than 50 miles to get a new job. (Loss of a job does not qualify as a hardship for borrowers who are current.) For borrowers who meet these rules, servicers will not have to get approval from Fannie Mae or Freddie Mac before approving the short sale, which should speed up the process.
Fannie and Freddie also will expedite short sales for borrowers who are at least 90 days delinquent on their payments and have a Fico credit score below 620. These borrowers will no longer have to document a financial hardship, and servicers will no longer have to get approval from Fannie or Freddie.
If there is a second mortgage on the home, the owner of the second mortgage must agree to the short sale before it can go through. They often will in exchange for a payment, but the negotiation takes time. To speed it up, under the new rules, servicers can offer a flat, take-it-or-leave-it payment equal to 100 percent of the second mortgage up to $6,000. They can't ask homeowners to kick in more.
The new rules are "a big deal if you have a Fannie Mae or Freddie Mac mortgage, you are underwater and not in default. It opens up the short sale for the first time," says Guy Cecala, publisher of Inside Mortgage Finance. "It's also a plus to have a program where a servicer doesn't have to give you a song and dance where they have to check with the investor" before approving a short sale. "It's also a plus to say, 'We will cough up $6,000 to pay a second-lien holder,' " Cecala says, although he questions whether that will be enough in some cases to get the second-lien holder to go along.
The impact on the broader market will be limited because Fannie and Freddie "account for 60 percent of mortgages outstanding but probably only 20 to 30 percent of problem mortgages because they generally required larger down payments," he says.
For more information, see the agency's news release at sfg.ly/O5MG58.