The Treasury Department has announced new guidelines to ensure ‘short sales’ will be more readily initiated. The program starts April 5, 2010; but servicers have the option of starting sooner. The administration is taking steps to prepare for the increase in short sales that the new guidelines will create in 2010.
A short sale is a workout program that allows a borrower to sell the property, even if the proceeds are less than the loan payoff, due to low property value. If approved, a Short Sale option can help a borrower avoid further collection activity or foreclosure action.
For homeowners, a short sale provides a more dignified transition than a foreclosure as they can time the closing of the sale to coincide with their relocation instead of being evicted by the sheriff.
It will also allow them to return to homeownership sooner. Fannie Mae, for instance, requires at least a five-year wait after a foreclosure but only two years after a short sale.
Short sales are also better for the neighborhood. The home stays occupied instead of becoming a vacant foreclosure that may attract crime.
Plus, a bank loses about 50% on a foreclosed house while only losing 30% on a ‘short sale’. This means that values of surrounding homes won’t be affected as dramatically as they would in the case of a foreclosure.
You may be asking: “Then why haven’t more ‘short sales’ been done?”
That is a great question. It seems that the service companies making the decision as to whether a home should go to foreclosure or be sold as a ‘short sale’ were receiving higher fees if they foreclosed on the house.
The National Consumer Law Center revealed this in a recent report. The report stated:
The servicer’s only incentive to favor the short sale is payments by the investor for performing a short sale….Only if those payments are larger…will the servicer’s scales tilt towards a short sale.
The report broke down the fees involved. Here is a table showing the impact on fees (positive or negative) based on the action the servicing company took:
But the good news is that this situation is being corrected. Servicing agencies will now be more positively rewarded to complete short sales. And it seems the administration is going to separate servicing companies to avoid conflicts of interest. Housing Wire, on January 21, reported:
The GSEs have been quietly looking to revamp their servicing models in the wake of a historic collapse in the nation’s housing markets. The prevailing theory is that agency servicers would either be categorized as performing or non-performing loan servicers, but not both — a drastic change from current servicing models, where the same servicer often manages both performing and non-performing loans.
According to sources, so-called ‘performing servicers’ would continue to get paid via a traditional servicing strip arrangement.‘Non-performing servicers’ would receive a smaller servicing fee, but would be eligible to receive more substantial cash incentives each time a delinquent loan reperforms, or if other loss mitigation efforts (such as a short sale or deed-in-lieu) succeed.
And it seems these changes are beginning to take place. Wilshire Credit Corp., the mortgage servicer bought by IBM in October, is getting set to receive a substantial servicing portfolio from the mortgage giant Fannie Mae according to industry sources. In the article announcing this, Housing Wire said:
Any mortgage servicing put with Big Blue and Wilshire Credit, however, would not include management of bank-owned properties within the portfolio. REO Insider, a sister publication, broke the news Wednesday morning that Wilshire Credit would shed its REO operations by March 1 — seemingly to gear up for the weight of the Fannie portfolio.
The new short sale process will be crucial to housing in 2010. It is encouraging to see that the plan is coming together.
