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Underwater Homeowners Get a Life Raft

The travails of the housing market in recent years are well documented. The prevalent symbols of this downturn are the “underwater” homeowners, who owe more on their mortgages than their homes are worth. About 4.6 million such homeowners have mortgages backed by Fannie Mae or Freddie Mac, and fully 80% of those owners haven’t missed any mortgage payments.

One way out of the predicament of the underwater owner is the short sale, in which the owner sells the home for less than the balance remaining on the mortgage. It is not a perfect solution that will wipe away all financial problems, but if the mortgage company agrees to a short sale, the underwater owner can “come up for air” by making the sale and paying off at least a portion of the mortgage balance with the proceeds.

In a short sale, holders of first and second mortgages must agree to the deal, because they are accepting less than they are owed. On the whole, short sales are seen as a positive for all concerned–and for the larger economy–but they have been plagued by lengthy delays and lots of red tape.

To address these concerns, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has recently issued new short sale guidelines. A few different short sale programs will be consolidated into one uniform program, and there will be clarification of the time by which, when a foreclosure sale is pending, a borrower must submit an application and a sales offer for consideration. The larger goal is to help more homeowners avoid foreclosure, keep more homes occupied, and help maintain stable communities.

These are the highlights of the new guidelines, which took effect on November 1, 2012:

  1. A streamlined process for those most in need. To expedite the process for borrowers who have missed payments, have low credit scores, or have suffered serious financial hardships, the necessary paperwork to demonstrate need will be reduced or eliminated.

  2. Easier and quicker qualification for some borrowers with certain hardships who are current on their payments. Servicers will be allowed to process short sales for these borrowers without any additional approval from Fannie Mae or Freddie Mac. Qualifying hardships include the death of a borrower or primary or secondary wage earner in the household, unemployment, divorce, a long-term disability, an employment transfer or relocation of more than 50 miles one way, increased housing expenses, natural or man-made disasters, or a business failure.

  3. Waiver of right to pursue deficiency judgments. In exchange for a financial contribution, Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments when a borrower has enough income or assets to make cash contributions or to sign promissory notes. As part of the approval process for short sales, borrowers will be evaluated as to their ability to cover the shortfall between the mortgage balance and the sales price for the property.

  4. Relocated military personnel. Members of the Armed Services who are being relocated will automatically be eligible for short sales, even if they haven’t missed a payment. They will also be spared the obligation to contribute funds to cover the shortfall from the short sale.

  5. Up to $6,000 for holders of second mortgages. In the past, second lienholders sometimes impeded the short sale process as they negotiated for the highest possible amounts toward what they were owed. As an incentive to make the short sale happen sooner rather than later, Fannie Mae and Freddie Mac will now offer up to $6,000 to those lenders when the short sale is completed. (But second lienholders will still have the ability to reject short sales if they so desire.)

The new guidelines are just one part of a larger ongoing effort by the FHFA to facilitate various foreclosure alternatives for strapped homeowners. The FHFA recently put into place strict timelines for servicers in the short sale process. They must review and respond to short sales within 30 days of a short sale offer, provide weekly status updates to the borrower for offers still under review after 30 days, and make and communicate final decisions within 60 days of receiving an offer and the complete borrower response package.

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