The so-called “fiscal cliff bill” passed late in the night on December 31st included an amendment extending the Mortgage Debt Relief Bill for one more year. This is good news for CA homeowners who remain underwater on their primary residence and are considering a short sale. Please remember not all taxpayers qualify under the terms of aforementioned bill. For that reason, consultation with a CPA / Tax Advisor / Accountant remains a prudent course of action for any homeowner evaluating options.
What does this mean in dollars to short sale sellers?
For example: If you sell your home for $100,000 less than you owe the bank, that $100,000 debt relief will not count against you as income received. You will therefore pay no federal tax on the amount you are short. If the bill were to expire, you could be looking at paying anywhere from 15% to 40% tax on that $100,000 (depending upon your tax bracket in individual situation).
What does this mean to short sale buyers?
The extension will likely increase the overall number of short sale homes on the market, which should increase supply and provide buyers with more options. The listings coming on the market could also be at a lower price point compared to non-distressed listings. However, buyers should be aware there may still be stiff competition for homes if you are in a resurgent market.
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.
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.
Source: Paraphrased from an article by Kathy Mehringer, Director of Risk Management for Coldwell Banker Residential Brokerage and Short Sale Advisor
The majority of short sale servicers/lenders (i.e. “the bank”) require some version of an Arm’s Length Affidavit. These documents and others like them typically stipulate that the parties to the transaction are not related to the sellers and that no party will receive any commissions or other compensation that are not previously agreed to by the lender.
Be prepared for other terminology to be used to describe these agreements. For example: Bank of America has, at the request of the National Association of Realtors® as well as the California Association of Realtors®, bifurcated their Affidavit into a: (i) Short Sale Addendum which requires the signatures of both buyers and sellers AND (ii) Licensee Certification which requires the signatures of both listing and selling agents.
It is important to understand that they are not optional agreements, regardless of what they may be called, and will require borrower(s) and buyer(s) signatures as well as listing agent and selling agent signatures. For that reason they ought to be read very carefully before anyone signs.
It is important to note that these Affidavits are signed under penalty of perjury and subject the parties to both criminal and civil liability should the terms of the Affidavit be violated.
The sad truth is Short Sale fraud continues to be problem that lenders/servicers are forced to address through prevention measures such as the Affidavit.
The majority of the Affidavits include a variation of the following provision: “Neither the borrower(s) nor the purchaser(s) will receive any funds or commissions from the sale of the Mortgaged Premises, except as allowed by the short sale approval letter.”
Simply put this means that a licensee who is acting as a principal as either buyer or seller will not be eligible to receive a commission. Some Affidavits take it a step further by including a provision that restricts payment of commission to a licensee who is related to the buyer.
My two cents: Any situation where an agent, seller, and/or buyer secure either a future interest and/or benefit financially through commissions, other payments, or resale of a property without the expressed written consent from the lender—in advance—puts all parties at risk of being prosecuted for defrauding the lender. For principals this could mean huge fines and/or jail time, and the same goes for agents who could also risk losing their real estate license. Best to understand the affidavits, and respect the law and short sale process as the lesser of two evils to get us out of this mess and avoid more foreclosures. –Grant Bixby
New Timelines Take Effect in June
April 17, 2012
Washington, DC – The Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to develop enhanced and aligned strategies for facilitating short sales, deeds-in-lieu and deeds-for-lease in order to help more homeowners avoid foreclosure. The effort will come in stages with the first taking place this June. The new, aligned timelines include the requirement that mortgage servicers review and respond to requests for short sales within 30 calendar days from receipt of a short sale offer.
“FHFA and the Enterprises are committed to enhancing the short sales and deeds-in-lieu process as additional tools to prevent foreclosure, keep homes occupied and help maintain stable communities,” said FHFA Acting Director Edward J. DeMarco. “These timeline and borrower communication announcements set minimum standards and provide clear expectations regarding these important foreclosure alternatives.”
With the alignment, servicers will be required to do the following:
- review and respond to requests for short sales within 30 calendar days from receipt of a short sale offer and a complete borrower response package;
- provide weekly status updates to the borrower if the short sale offer is still under review after 30 calendar days;
- make and communicate final decisions to the borrower within 60 calendar days of receipt of the offer and complete borrower response package
By the end of 2012, Fannie Mae and Freddie Mac will announce additional enhancements addressing borrower eligibility and evaluation, documentation simplification, property valuation, fraud mitigation, payments to subordinate lien holders, and mortgage insurance.
*My two cents: First, it’s about time. Second, it’s about time. If you read the language, this still gives banks plenty of ways to stall. While it puts in place response times and attempts to cap the final approval or denial date, it does nothing to increase transparency otherwise. For the average buyer and seller, the short sale approval process is shrouded in mystery and decisions are made with little to no explanation, or communication, for that matter. We can only hope that this speeds the process up, thus easing the pain a tad for all sides involved.