New FHFA short sale guidelines go into effect, open pool of potential applicants

Starting November 1st, new short sale guidelines from the Federal Housing Finance Agency (FHFA) will take effect. The streamlined program rules are meant to enable lenders and servicers to quickly and easily qualify eligible borrowers for a short sale.

The new guidelines will permit a homeowner with a Fannie Mae or Freddie Mac mortgage to sell their home in a short sale even if they are current on their mortgage if they have an eligible hardship. Servicers will be able to expedite processing a short sale for borrowers with hardships such as death of a borrower or co-borrower, divorce, disability, or relocation for a job without any additional approval from Fannie Mae or Freddie Mac.

Fannie Mae's Home Affordable Foreclosure Alternative (HAFA) and proprietary short sale programs, and Freddie Mac's HAFA and proprietary short sale programs are being aligned to add to the efficiency of the new guidelines. The current Fannie Mae and Freddie Mac HAFA programs are modeled on the U.S. Department of Treasury's Home Affordable Foreclosure Alternative program, but with this guidance, there will be one program offered by Fannie Mae and Freddie Mac - The Standard Short Sale/HAFA II.

As it pertains to the world of settlement, the servicer now must instruct the settlement agent to ensure "the deed conveying the mortgaged premises from the borrower to the purchaser contains a provision to restrict any re-sale of the mortgage premises for 30 days following the short sale closing." The deal must also restrict re-sales of greater than 120 percent of the short sale's sale price for the period beginning 31 days after the short sale closing and ending 90 day from the short sale closing.

The deed must contain the following provision:

"Grantee herein is prohibited form conveying captioned property for any sales price for a period of 30 days form the date of this deal. After this 30-day period, Grantee is further prohibited form conveying the property for a sales price greater than $ (120% of short sale price) until 90 days from the date of this deed. These restrictions shall run with the land and are not personal to the Grantee."

The FHFA believes the new guidelines accomplish the following:

• Offer a streamlined short sale approach for borrowers most in need, essentially moving the process forward for borrowers who have missed several mortgage payments, have low credit scores and serious financial hardships the documentation required to demonstrate need has been reduced or eliminated.
• Enable servicers to quickly and easily qualify certain borrowers who are current on their mortgage for short sales, with the common hardships being death, divorce, disability and distant employment transfer or relocation. With the program changes, services will be permitted to process short sales for borrowers with these hardships without any additional approval from Fannie Mae or Freddie Mac, even if the borrowers are current on their mortgage payments. Borrowers will now qualify for a short sale if they need to relocate more than 50 miles from their home for a job transfer or new employment opportunity.
• Offer special treatment for military personnel with Permanent Change of Station (PCS) orders.
• Consolidate existing short sales programs into a single uniform program, which will give servicers more clear and consistent guidelines in order to more easily process and execute short sales.
• Provide servicers and borrowers clarity on processing a short sale when a foreclosure sale is pending. The new guidance will clarify when a borrower must submit their application and a sales offer to be considered for a short sale, so that last minute communications and negotiations are handled in a uniform and fair manner.
• Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders to expedite a short sale. Previously, second lien holders could slow down the short sale process by negotiating for higher amounts.
• Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make cash contributions or sign promissory notes.

This alignment comes as part of a broader FHFA effort, the Servicing Alignment Initiative, to streamline Fannie Mae and Freddie Mac programs for short sales and other foreclosure alternatives to assist struggling homeowners. Servicers are required to review and respond to short sales within 30 days of receipt of a short sale offer; they must provide weekly status updates to the borrower if the offer is still under review after 30 days, and they must make and communicate final decisions to the borrower within 60 days of receipt of the offer and complete borrower response package. These 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.