In August of 2012 Fannie Me issued new Short Sale guidelines that will become effective November 1 2012. These guidelines are for mortgages owned by Fannie Mae. So if a loan is owned by JP Morgan Chase, these guidelines mean nothing. To determine if Fannie Mae owns the loan on the home being sold, click here.
The objective of the new guidelines is to facilitate the short sale process. Per the announcement on the fannie mae website:
“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, senior vice president, National Servicing Organization, Fannie Mae. “We want to help as many homeowners avoid foreclosure as possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us. These new guidelines will open doors to help more homeowners qualify for short sales, remove barriers to completing short sales, and make the process more efficient for homeowners and servicers.”
This appears to be good news for those realtors, attorneys, and sellers. So I took the time to read the guidelines. I made a list of what I believe are the important points:
- Servicers now have the ability to approve a short sale without the written approval from Fannie Mae. To do this the servicer, the one collecting the monthly payment and managing the escrow account, must meet the conditions of the guidelines (The list of items I have written in this blog.). This of course appears to be a very good thing, not needing to wait for the investor, in this case Fannie Mae, to issue an approval. However, there are still a number of requirements that each servicer will want to review twice if not three times to be sure your one individual loan qualifies. Because if they are wrong, they will have to explain to Fannie Mae why they allowed this short sale, and may possibly be on the hook for a penalty to Fannie Mae. Dealing with servicers everyday I have learned that they are not inclined to take any risks and will continue to seek written approval from Fannie Mae regardless of this new found freedom.
- One of the qualifications required to allow the servicers to issue an approval for a short sale without the written permission from fannie mae is if the person meets the acceptable Forms of hardship. They are:
- Death of a borrower or co borrower on the mortgage
- Legal separation
- Reduction of income
- Increase in housing expenses
- Disaster damage
- Business failure
All of these forms of hardship have not changed, they have always been the only acceptable hardships. However they state, if a seller is more than 90 days late and have a credit score of 620 or less, the proof of the hardship does not need to be supplied. This is very good as most of the sellers I have worked with in a short sale are late more than 90 days on their mortgage thus have a credit score of much less than 620.
- If the seller is 31 days or more late on the mortgage the property can be a primary residence, second home, or investment property. If it seller is 30 days late or less, or not late at all, it can only be a primary residence.
- 4. The servicer must calculate a monthly expense number for the borrower. What is important to note here is that if the servicer does not know the amount for the property taxes or the home owners insurance, they are to estimate. This can work against the seller if the estimation is too low. Therefore it is very important that when an application for a short sale is submitted to the servicer it include very clearly the accurate amount of the property taxes and the home owners insurance.
With this monthly expenses that will include your mortgage payment, and all debts that appear on a credit report, second mortgages, and certain housing expenses, the servicer will determine, based on the income provided (Your gross income, BEFORE taxes or deductions are taken out of your pay if W-2 income. If self employed it would be what you are showing on the profit and loss provided.) if your debts are equal to or greater than 55% of your income. A simple example is if you make $4000 a month and your monthly expenses are $3000, your debts are equal to 75% of your income, the lender would approve this because it is greater than 55%. However if your income is $4000 a month and your debts are $2000 a month, your debts are equal to 50% of your income, you would not qualify for the short sale unless you are going to make a cash contribution.
- The new guidelines provide a formula for determining if the seller will be REQUIRED to make a cash contribution or sign a promissory note in order for the short sale to be approved. The formula has a few steps:
- First, the Cash Contribution it depends on what assets you have. If you have more than $10,000 in any type of account, checking, savings, CD, Annuities, retirement savings, mutual funds, stock market account, anything that has a value, OR if the seller has 6 X the monthly mortgage payment that includes the property taxes, home owners insurance, HOA fees, Condo or coop monthly charges, and PMI if applicable, then a cash contribution of 20% of the total cash on hand will be asked for, possibly more, depending on how much assets the seller has.
- Second, the Promissory Note. If the sellers percentage of debt compared to their income as described in number 4 above is less than 55% a formula is used to calculate the cash contribution in the form of a promissory note. It is rather complicated so for the math geeks out there it is:
First you must get the difference between the percentage of the sellers debts when compared to their income and 55%. You take this percentage and divide it in half. This figure, a percentage, is then multiplied against the monthly income. The figure you get is then multiplied by 60 as in a cash contribution in the form of a Note, that is payable for 60 months or 5 years. So with numbers:
Sellers debt compared to income ratio is 49%. We first subtract 49% from 55% and get 6%. This 6% is multiplied by the monthly income, for example $4000. This gives $120. $120 is multiplied by 60 to equal $7200. $7200 is a note that is paid off in 5 years or 60 months at a rate of $120 per month.
These are the two formulas to use when determining if Fannie Mae will require the seller to make a cash contribution or to sign a promissory note. I believe this is very helpful as it can used early on in the process to make the seller aware of what may happen so that the sellers can seek out advice and counsel on this issue and determine what is right for them.
- The guidelines require that an interior and exterior BPO or appraisal be used for determining the value for a property. This is very important and positive. Often times a drive by only is ordered and the real negative to the property is the interior. This will help in getting BPO’s and Appraisals that are accurate, which can only help more short sales close.
- The guidelines state that all subordinate liens will have a total of $6000 from the sales price to be used for subordinate lines. If the buyer, realtor or someone else wants to come up with the rest of the money to release a lien, no problem. But Fannie Mae will only allow $6000 from the sales price to be used for this.
- Fannie mae has made available to the servicers the Minimum Net they Require (MNR). It states explicitly in the guidelines that this information should not be shared with any interested parties to the transaction. This is not new info. All those working on short sales have seen a property or two (sadly sometimes more.) not close as a short sale, end up as a vacant REO that sold for 40% less than the Short sale we put together. So there has always been a number that the investor wants and appears to willing to risk getting less.
- The new guidelines spell out unacceptable fees that Fannie Mae will not pay for. They include:
- Short Sale Negotiation fees or any third party fee for negotiating the short sale.
- Any commission to a realtor that represents the buyer.
- Buyers discount points or Mortgage Loan Originator fees.
- The guidelines also make it clear that a home that is purchased as a short sale and is owned by fannie mae cannot be sold within 30 days of the short sale, or sold for 120% more than what was paid for the home in the short sale if sold within 90 days of the purchase. This language will be required to be added to the contract of sale.
In my area many times, not all the time but many times, the purchaser of the home is an investor looking to flip the home within 90 days. This could become a problem with some of my short sales.
- If the seller qualifies for the short sale and the seller is NOT receiving any cash incentives from any source, Fannie Mae will give the seller $3000 to relocate.
- The guidelines also address the foreclosure process. It states that the servicer, on a fannie mae owned loan, must review all applications for a payment plan or alternative to a short sale submitted between 75 to 15 days before the foreclosure sale. This is good because often times the seller is in the middle of a short sale when they are told the home is being auctioned. Now there is a hard fast rule to look out for this. However if the servicer receives the request for a work out plan or short sale within 15 days of the auction, they are not required to look at it.
- The guidelines also state that when a foreclosure sale date has been set not more than 15 days before and not less than 7 days before this date, a certification of foreclosure that will be required by the attorney holding the foreclosure auction, should not be issued if:
- A closing date on a short sale has been agreed to and set up with the approval of Fannie Mae
- A repayment plan or short sale application has been received and an offer for a replyment plan or short sale was made by the servicer.
This too is good news because now there is a rule that addresses servicers pushing for the foreclosure when some type of arrangement, whether it be for a short sale or a loan modification, has been made. They cannot continue and they have to respond in a timely fashion.
In conclusion, of course these guidelines will not make every short sale an easy process. Certainly there any many good points to these regulations. The benefit here is that the rules to the playing field are being made known. Other than the Minimum Net Received mysterious figure mentioned above there are good concrete items to discuss with a seller and that is needed in order for a short sale to be successful.
I provided a link to every document I used to write this blog. Please take your time to read the guidelines yourself and let me know if there is anything that I left out. Short sales are gaining momentum as being a good portion of the sales happening today. It is important to know this information so that you can close more deals, and not waste your time on ones that will never close. It is also good info for when speaking with a negotiator from the servicer, to know this info and help direct the process.