New Short Sale Regulations

New Regulations Make Short Sales Better

The U.S. Treasury has new regulations to speed up the short sales process and to make it a better deal for sellers and lenders.

Previously, homeowners have been left waiting for their banks to decide whether to approve a short sale for their property.  New federal guidelines give banks a 10 day window to give a response on a purchase offer.

In Florida’s real estate market, approximately one of every five home purchases is a short sale.  U.S. Treasury regulations allowing financial incentives to banks and sellers may have a significant impact on this market.

A RE/MAX Select agent from Oviedo, Florida, Gary Balanoff, advises clients to plant for a minimum 60 day wait when buying or selling a short sale home.  The new regulation, requiring a response from the bank within 10 days, will not change his advice to his clients.  He hopes the new regulation will shorten the waiting period, but feels this is a difficult process and there may still be delays.  Compliance with the regulation would decrease the amount of time the process takes, which would be better for everyone including the lenders.

The only banks that are affected by the new regulation are ones that owe TARP bailout funds to the federal government.  Balanoff feels that the lack of consistency among mortgage negotiators will make the new deadline difficult to apply and enforce.

A short sale happens when a property is sold for less that the amount that is due on the mortgage with the lender forgiving the difference.  A property is “underwater” when the value of the property is less than the amount the homeowner owes on it.

Orlando’s Regional Realtor Association reports in December of 2009, 20% of home sales were short sales.  Another 43% were lender owned properties, with the balance of 37% consisting of traditional sales.  Short sales are often considered the best solution for the banks and for the “underwater” homeowners, however the transactions are typically very time consuming because the banks may take weeks or even months deciding whether to approve the sale or not.  This will often cause buyers to become frustrated enough to walk out on the transaction.  Sometimes properties stay unsold, extending the housing turndown, when banks demand that borrowers take some of the financial losses.

The new regulations not only impose a deadline, they also give sellers $1,500 for moving expenses, with no repayment by the seller.  Lenders benefit from the new regulations as well, they receive $1,000 for processing and other administrative costs.  And even the investors who own the mortgage receive a maximum of $1,000 to allow up to $3,000 to be given to secondary lien holders from the proceeds of the short sale.

Making Home Affordable, a new loan modification program under the Obama administration, requires that all 83 participating lenders follow the regulations for any borrower who has not completed loan modifications or who has requested a short sale.  These regulations do not apply specifically to Freddie Mac or Fannie Mae loans.  These two mortgage companies are run by the government, account for approximately have of the U.S. mortgage debt and follow their own rules.

For homeowners who have been waiting for months for their short sale approvals this plan, which is supposed to be in effect by lenders as of April 2010, should help put the frustrating experience behind them.

These new regulations were put into effect to make the short sale a better tool according to Ron Klein, U.S. Rep, D-Fla.  They are supposed to standardize the paperwork and benefit sellers and buyers by giving them an approval or rejection quickly.  Many homes have two liens; the secondary lien holders feel that the $3,000 maximum of the short sale proceeds is too small.  They have been trying to get this amount increased by refusing to release their claims on the properties until they receive additional money from the sellers, the primary lien holders and the real estate agents.

In Florida, some real estate agents have a great deal of skepticism regarding the new regulations, believing that lenders are still likely to create difficulties for everyone by continuing to do business as usual.

The Treasury intends to issue significant penalties for lenders not in compliance.  They can fine the lenders, reduce or withhold incentive payments, even require that loans be modified when they have been improperly rejected.

Lenders often blame the delays related to short sales on the complexities involved in completing them, the quantity of short sales to be processed and on paperwork that is submitted late or incomplete by the borrowers.  All of these problems make meeting the 10 day deadline challenging according to Anthony DiMarco, an Executive V.P. of government affairs at Florida Bankers Association.  Ward Kellogg, chief executive of Paradise Bank out of Boca Raton, feel s the regulations will contribute to clearing the market of distressed properties.  He believes that, while the lenders are not the cause of the delays, putting pressure on the lenders to get these short sales cleared up will be a good thing.