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Renavigating the Short Sale Waters. What you should know about MHA

Sailing the rough short sale seas No sooner than when you thought you knew everything there was about how to navigate the often choppy Short Sale Waters, does the government come up with a new plan that will drastically change the way that short sales are going to be looked at by lenders. The new Making Home Affordable (MHA) program will require home homeowners, Realtors and lenders to do things differently. Very differently.

The Making Home Affordable program, which is being managed by the US Treasury Department and Fannie Mae covers the great majority of all loans underwritten in the United States (by some estimates, more than 85% of eligible delinquent mortgage loans will be covered), including loans owned or guaranteed by Fannie Mae or Freddie Mac, FHA loans, and loans managed by 63 of the major servicers as of September 30, 2009. For these loans, the new MHA policies and processes are mandatory.

The Good, the Bad and the Ugly
The good news is that the MHA guideline are aimed to standardize and simplify the short sale process, rules and paperwork for lenders. The bad news is that there are literally thousands of loss mitigators out there who need to be trained and taught how to implement the new guidelines before the new program can be viewed to be successful and being applied on a consistent basis throughout the country. As can be imagined, this is a monumental chore. However, to speed up the implementation, Freddie Mac has been selected to audit servicers' files and to issue fines to servicers who haven't fully complied with the MHA process. It is hoped that this approach will increase timely compliance and adherence to the new guidelines.

Why it's Ugly for Realtors
Realtors who want to close short sales must be familiar with the new MHA rules, guidelines and use the new standard forms. Although the intention is that this will make things easier for all involved, because procedures amongst lenders will be addressed on a consistent basis and handled in a consistent manner, the Making Home Affordable program will require Realtors to be at the top of their game and know their way around the program rules and guidelines, not only to counsel potential home owners, but to actually educatethose Realtors that have short sale listings that don't seem to understand the impact that this legislation will have on them.

In general, there are three key changes to be taken note of; although there are likely to be some small differences based on whose loan it is:

How MHA will affect you

There are clearly defined steps which the servicer's loss mitigator must follow when a loan is in default (or imminent default ). Homeowners must first attempt to approach the lender with a request to refinance or modify the existing loan. If the lender is unwilling or unable to refinance or a modify the terms of the loan then and only then will a loss mitigator consider the possibility of a short sale. This is the only time during the loss mitigation process when the approval for a short sale can be considered. The loss mitigator will apply a specific net present value formula to determine if the lender/investor will net more from a short sale than from a foreclosure. The decision is strictly a financial one. This means that the request for short sale approval will be considered only if it is financially to the lender's advantage.
The seller will still sign all listing contracts with the Realtor, but the loss mitigator sets the price and the listing term which can can be as few as 90 days to as long as 365 days. In all cases, the servicer/lender still must accept the contract which your seller has approved.
With regards to commission structures, Fannie Mae's Servicing Guide Announcement #09-03 clearly states there will be no negotiation of short sale commissions. "...closing of pre-foreclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to the level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6% of the sales price of the property in aggregate." In other words, if the Realtor has negotiated a listing fee with the seller, the servicer/lender may not ask you to reduce that fee.

Is it business as usual?
No one knows for sure how this is all going to pan out. But there are definitely some positives for the distressed homeowner and their Realtor because there will no longer be an uncertainty as to price and whether the short sale will be approved - or how long it will take to obtain the shorts sale approval.

Lenders will probably still require that delinquent taxes and other liens be addressed by the buyer unless these items are considered as part of the short sale approval. Therefore it is also incumbant on the listing agent to work proactively with the homeowner in presenting a complete summary of the homeowner's true financial position.

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Posted by Martin Kalisker, WEICHERT, REALTORS®- Synergy: Metrowest's Preferred Realtor on 10/16/2009 02:36 PM

Comments (53)

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53 Comments on Renavigating the Short Sale Waters. What you should know about MHA

OCT

2009

Very interesting article in a constantly changing market.

A pre-approved short sale would be incredible. Short sales could become very attractive to those buyers and agents currently avoiding them.

As with most things the Govenment gets involved with this will no doubt turn into a fiasco that short changes the consumer.

Martin- I see ALL kinds of issues and problems with this new program for short sales with the least of them being that anything the government is involved with- well- we can add to that list all day long.

Nevertheless ( I will have to write a post in response to this)- in short:

If the homeowners are made to go through the loan mod or refi process here are those problems:

The homeowner than gives up financial information in order to get a loan mod but then that can back fire in getting qualified for the short sale.

What if the homeowner is an investor and owns many properties, like many of our short sales that we do in Florida.

What if the homeowner is relocated, loses their job or gets ill or has parents who get ill and they have to move- they have to go through some stupid refi process first? Which of course, will take about 4 to 6 months just that process alone.

How long do you stand in dmv lines- how much more complicated is a short sale/refi/loan mod process? So we should start telling homeowners that their short sale may now take up to 12 months, hmmm, wonder how many buyers will hang out for that one.

Pre- arranged pricing set by a lender? Interference with a listing agreement between seller and listing agent? That does not sound like racketeering? So they set a price in May and the prices fall each month and the short sale does not get approved until October, now the buyer's lender's appraisal comes in below the price set back in May? I see a whole lot of issues in pre setting market prices. This has always been an issue when we do short sales and this will just make it worse.

My list goes on and on. We close short sales every week- we have not lost one yet, yet it seems the government and the big banks- BofA are out to make sure our record won't stand. :) Katerina

Wow, I can't help but feel this market will be a thing of the past by the time we are all on board with every procedure. This is a great post with great information. Thanks!!

Excellent information. Thanks for sharing and keeping us informed. I've found the "key" to negotiating successful short sales, besides dotting i's and crossing t's a hundred times, is COMMUNICATIONS. Communicate with the loss mitigator -- when you finally get to him or her; communicate with your seller client -- who is probably anxious and depressed; and communicate with your buyer's agent -- in hopes that they won't walk away from the deal.

This sounds like it may create more problems than it solves. Unless the banks can figure out how to do a loan mod in 30 days instead of 180, this is just going to add to the problems. Will the banks wait to foreclose through two processes? What happens if the loan mod is denied, and the homeowner is in foreclosure? Will they foreclose before an offer can be obtained for a short sale? Why should the bank be allowed to interfere even more with the listing contract by determining the length of the contract?

I could go on, but will leave it there.

Time will definitely be of the essence here. So will assigning appraisers who know the market.

OCT

2009

Christine- I was going to bring up the point of interfering in the length of a listing agreement also. Who are they to determine the length of a listing. All our short sale listings are 12 months long because of the time it takes. So they are messing with the realtors businesses again. And then what, we have to go on listing presentations and then have to be the ones to tell the homeowner that they are NOT allowed to do a short sale until they try for loan mod? Are you kidding me? Are we going to be taking post dated listings then so another agent does not come along in the meantime after you helped with the info? I can not believe this crap! Katerina

Taking a listing for less than the time needed for the proper exposure is like going on a 1000 mile plane trip with only 300 miles of fuel. Leave it to the government and lenders to cut red tape lengthways while creating loopholes for them-selves at the same time.

Great post!

I am from the government and I'm here to help you...die early from depression and stress.

Seriously, there is one fundamental truth here. The lenders have been messing with the minds and lives of millions of people for too long with no pressure from the government to deal with their borrowers in a fair and timely way.

Millions of Americans sat still for the bailout of the banks hoping that something good might come out of it - namely that the banks would get in and renegotiate loans that were underwater and/or unreachable for the borrowers.

That did not happen. The banks have been putting the foreclosure screws into play while in the other parts of their business jacking up interest rates on credit cards - even to people who have never been late.

These new federal rules (and similar laws enacted in several states (including Oregon)) would never have come into being if the banks were being ran by people instead of by a pack of thieves.

Now they will have to consider loan modifications. They should have already done those on a blanket basis before now. They can act with dispatch and efficiency to jack people's rates upward. They should be able to do so downward.

I cannot believe what a mess the banks continue to make with this crisis! I recently got my CDPE designation just to learn more about the short sale process. End result? I not doin' them. I think the loss mitigation business is fraught with abuse.

At least there are SOME guidelines being put in place. I do a ton of short sales and I am glad to know there is some action being taken. It would be nice to have a button to push whenever the banks violate these guidelines. I also see some problems with innacurate appraisals and other issues causing more delays and frustrations.

My understanding is that the making home affordable is for owner occupants. I also handle a lot of investors in Florida. I wonder how those will shake out.

Great post! Love all the coments!

This will force the banks to do some of their 'homework' up front........ideally

I don't like banks telling me how long a price will be good for and setting expiration dates - but I guess after mulling it over, I think it is more fair to all involved to know up front what your limits are. Because, in the end, I like even less to be working on a short sale for 8 months on behalf of my seller only to find out from the bank no way, no how.

Great Post by the way.

Martin, I have short sales right now that have been with BofA since April. I am all for anything that will help or speed up the process. BUT I'm not sure about this MHA program. Unless it gets streamlined it will just cause delays and further decline in property values. It will be intersting to see how this all plays out.

I would love to have you join shortsalesuperstars dot com and post this article over there.

Martin, very interesting information, thanks for sharing. Anything that can speed up the short sale process in my opinion would be a good thing, whether it's done ahead of time or after an offer has been received. The commenters have raised some very valid points as to the execution of this new program.

Martin, I heard this might be changing the short sales. I'd like to see BOA shorten their acceptance time, however, most of the other banks are pretty fast at making decisions. It would be nice to have an acceptance for a short sale before you get the offer, but markets change and so must the short sale value

I read the guidelines this week.

In Michigan many don't want to modify...they lost a job and any modification they wanted would not be enough.

Some of my sellers found jobs for less money out of state or location. They had to move.

They want to sell.

IN my humble opinion and in the Ann Arbor Area, they are selling short NOT to move up or DOWN but to get out from UNDER and avoid the foreclosure.

Great Post, Martin! After reviewing the link on MHA that you included, I decided to google for more info, and discovered there was an UPDATE to that info, which provided more detail regarding short sales. You might want to insert this into your original post because it's very pertinent:

http://www.treas.gov/press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf

Also from the treasury department. A couple of things I found interesting:

1 - the bank would be involved in the short sale process BEFORE the process begins, rather than AFTER marketing and acceptances of a contract by seller

2 - Commissions would be agreed to UP FRONT...no bank required commission reductions "after the fact!"

3 - Bank's would be involved in the establishment of the LIST PRICE of the property to begin with (which let's EVERYONE know up front whether a short sale would likely even be feasible....if the bank REQUIRES too high a price, everyone will know....THEY REALLY ARE NOT GOING TO APPROVE A PRICE THE MARKET IS GOING TO BEAR)

4 - Listing periods in the 90 day to 1 year range.

I just went through a (DENIED) short sale with CHASE....abysmal!!!! After 4.5 months, 2 bpos, 7 (yes SEVEN) HUD1s, their own "internal" financial reassessment, they told us they REQUIRED an additional 15% before they could approve the contract!!!!! Seller certainly didn't have it. Buyer didn't have it! I find it hard to imagine they exepected subsequent HUD1s to give them substantially different nets! So why did they string everyone along for 4.5 months!!!!!

Thanks for the info!

I have 2 approved Short Sales through B of A..I am the LA. Unfortunately, the boiler plate acceptance letter B of A sends out, states that Lender may pursue Seller for any deficiencies...and they can do this in CA, which is a non-recourse state, for up to 3 yers. BOTH my Sellers decided they would rather go to Foreclosure than risk the bank coming after them for the deficiency judgement!

CA may not BOTH 1099 the Seller AND sue, but they can do one or the other. B of A will NOT negotiate the terms of this boiler plate letter. Arizona has now instated a law as of 9/30 (they are also non-recourse) preventing the deficiency judgements for Short Sales..CA has not yet.

We will most likely have to use broker attys to sue for commissions..over 13 months work on one of them..

Great information from everyone and a LOT to think about. The short sales I've completed this year have taken way longer than was necessary, but not as long as some of the comments here indicate they have had to endure. I'm not so sure the new guidelines will help in shortening the process, which I believe is the goal here. A streamlined process would be great, but my fear is that these procedures will end up taking longer than it now does in order to get through all the red tape. The biggest problem I see is the interference in the listing contract - this is a huge red flag. In the long run, what will be, will be and we'll all have to adapt. It is good to see that the banks will no longer be able to cut commissions, that is IF they are within the guidelines...

In any event, how this plays out in the end will indeed be very interesting. Real Estate in 2010 will be a completely new thing and education for Realtors will be key. There are currently several routes to take in educating ourselves: CDPE, SFR, CAP How do we know which is best, do we need to take them all?

Since I didn't log in first, my info did not transmit. Here it is

Deb Casper, CRS, RE/MAX Specialists, White Bear Lake, MN

Two very interesting points in this article.

Homeowners must first attempt to approach the lender with a request to refinance or modify the existing loan. If the lender is unwilling or unable to refinance or a modify the terms of the loan then and only thenwill a loss mitigator consider the possibility of a short sale.

and

This means that the request for short sale approval will be considered only if it is financially to the lender's advantage

Most people want the bank to "help them out" but this makes it really clear that the bank is only going to help the bank. I don't think most short sale owners are going to like this way at all. May we live in interesting times...

I can see how these changes may lead to more foreclosures, in some cases. One of the biggest problems I see is in the lender setting the price. Are they going to have an appraisal done or BPOs to determine the price? Local real estate agents know the market and are generally better at determining price than a clerk sitting in a cubicle on the other side of the country.

I think this is good news over all and will either get the short sale moving or in foreclosure. The biggest problem now is indecision.

I would love to be able to market a short sale with a price already agreed upon by the lien holder. That would remove one of the buyer's concerns, too, and encourage to stick it out. What baffles me, is why this has to be done by legislation - the banks should have been willing to work with us in this way all along. In the entry-level price range, where most of our short sales are, 90 days would be plenty of time with that roadblock already being overcome. In face, we're in a position of not having enough entry-level homes to meet demand very soon, and this could get a few more on the market.

The Institute for Luxury Home Marketing has created a Center for Asset Preservation that offers training on the new MHA program.

http://www.centerforassetpreservation.com/center-for-asset-preservation/caphome.html

Tami and I just attended their short sale summit in Houston. Their course can be taken online.

Good point raised by Joette - pre-negotiated short sales would be a great boon to getting them sold quickly. My concern is will the pricing be current, as how long of a delay will there be between the time of our initial listing appointment with the seller and the approval by the bank? How long will it take them to get the BPO's, appraisal, etc. in determining the price? If history repeats itself, it very well could be that the pricing will be outdated by the time we get the go ahead.

And what if the property is already listed, are they trying to tell us they will make the borrower CANCEL the existing contract? What's next? The banks / government requiring the homeowners to use bank-issued "assigned representatives" to list the property? All of this would be really funny if it wasn't so sad...

We would all like to see the short sale process shortened and simplified for all parties benefit. Knowing that the bank is involved upfront instead of weeks or months later may encourage buyers to make reasonable offers and certainly generate less stress for everyone involved.

I just blogged yesterday to demonstrate how short sales are clogging up sales in the Northern Nevada area. We used to have 300-400 homes sell a month. In July and August the average was 150 and in September it was 38. There are so many short sales out there - with the values changing by the moment - that I believe the banks are waiting until they can foreclose because they'll make more money by foreclosing and selling it themselves than approving the short sales. The difference as I've calculated it can be 10-15% at a minimum.

This is old news. Nothing has really changed - I have closed Fannie and Freddie sales in October and have 2 more approvals for November where the sellers were not required to pursue loan Mod's. My typical client is either in a divorce situation or has to move for employment. In neither of these situations does a loan mod make sense.

I have worked with bank set pricing and I like it. The approval process is 10 days verses 10 weeks.

I'm very pleased to see the quality of the discussion that this post has solicited. Banks, lenders and investors are all facing immense pressure to improve the way that they conduct business and short sales in particular. Unfortunately, this goes beyond finger pointing at the unregulated mortgage broker industry and underwriting practices. The consolidation of financial services in the Clinton era has caused immense conflicts of interest to groups like Chase who underwrote loans, securitized them, and repurchased them through CLO (collateralized loan obligation) trusts, administered and manged by affiliates of Chase and third party investors (i.e. hedge funds and CLO pools). If the lender authorizes a short sale, irregardless of whether the defaulted portion is recourse or not, they could be seen as acting in the best interests of the bank, which is in conflict with its duties and obligations as Trustee.

On top of the MHA program, certain legislators are pushing for changes to allow the judicial branch to "cram" loan modfication terms on the lenders - just as they currently do for every other creditor in a bankruptcy estate. So, now even if the banks can work through the issues related to the cost/benefit of allowing the short sale, the banks may still lose out if a judge forces them to modify the loan before foreclosing.

One of you wrote "may we live in interesting times." I think we are already there.

Anyone want to take me up on BofA's comments that they want to increase the number of modifications on Interest Only loan products? Before you do, please understand that by doing so carefully, they may actually prevent a larger impact to our economy by preventing multi-million dollar homes and communities from tumbling down the steep slope of foreclosure.

BB - thanks for the invite. I'm headed over there now!

I'm interested to see how long these "refi attempts" take to actually execute. This could either be fantastic or horrible... I suppose we'll wait and see.

Unless the rules change so that potential foreclosure activity is suspended once an individual applies for a modification, I don't see these new rules as being helpful. If an individual is in financial distress and they have to wait, the now typical, 6 to 8 months to hear about a mod before they can request that the lender consider a short sale which also takes anywhere from 3 to 8 months, they'll lose the house to foreclosure before a short sale can come to fruition.

From what I've read, the lenders aren't doing a great job of cooperating with this program. In August, BofA had only modified 7% of the eligible loans. They increased that dramatically after being embarrassed by the publication of that fact.

But, I don't see the lenders getting together around a table and standardizing their forms and processes. Moreover, since short sales affect their balance sheets more negatively than a foreclosure does, it's hard to see why they would be very excited about any of this.

So many questions ...

Exactly when does this go into effect?

What if the homeowner doesn't like the terms of the loan modification? Anyone would be all all for a lower monthly payment, but not in exchange for owing more than they do now!

What if the sales price the loss mitigation department determines is too high for the market to bear? Is the home seller just out of luck?

The guidelines say that junior loans must be settled before the short sale can go through for the first. Does that mean the primary can wash its hands in regards to the junior? If so, does that mean that anyone with a junior loan is also out of luck?

What if the home can't be sold within 3 months? Does that mean the homeowner is, again, out of luck?

If I were a conspiracy theorist, I would surmise that these new regulations have been put into place precisely because so many real estate agents have finally figured out how to get a short sale through the system. But since I'm not a conspiracy theorist ...

Great post! But, it leaves me preplexed. Everyone (real estate saleman) seems to be in agreement that the short sale process is a broken nightmare. We all know the banks were given billions and billions of taxpayer money to cover them for the bad loans that they (the banks) wrote in an attempt to make a profit. Yet, so many (real estate agents) seem to find the government at fault or adding to the problem we all want fixed.

Excellent information. We've been successfully specializing in short-sales since mid 2005 and have been as a part of the evolution of how these things get done as we have been a witness to the evolution.

We seen first hand how lenders have buckled under the deluge, and struggled to create, adapt, and adopt systems, & new personnel to handle it all; it hasn't been pretty.

All in all, I think these newest guidelines under the MHA program will generate significant improvements to the process, and remove substantial "waste" from it. Two thumbs up!

I am a realist however. As such, I realize that since this all began, every single short-sale processing problem has been about only one thing: volume, and the inability to deal with it. Nothing else, only volume. Lenders and servicers have thrown money at the issue of volume, they've thrown significant human resource increases at it, they've attempted, and re-attempted modification of their protocols, expanded coverage, added whole depts, fax numbers, e-faxing, imaging, more new or expanded depts, with support depts to support those depts....etc.

Too date, NOTHING has resolved the overall, and underlying problem of, volume. Frankly, I do not hold out hope that ANYTHING ever will, except a decrease in.... you guessed it.... volume.

If I am an optimistic realist, I can hope that eventually a more streamlined process can have a possitive impact, but for now, its the status quo.

Hey guys,

We wrote about this very topic extensively on our blog. Check it out if you have the chance

Please remember...this is merely proposed guidelines. The lenders can choose to participate...or not. None of this is new. MHA proposed short sale guidelines have been floating around for nearly a year.

To make the point...I emailed a higher up at Wachovia, Wells Fargo....and 2 smaller banks and asked them if they are following the MHA guidelines. The Wachovia executive responded the most directly.....'Wachovia is not participating with the proposed MHA guidelines.'

As many of you have stated closing short sales IS becoming easier.

Here's why:

1) The servicers are moving employees away from asset management into loss mitigation. They are doing this because the whole industry is embracing short sales as the (ideal and really best) solution. Lenders lose less...

2) The process of closing a short sale DOES follow specific rules. You DO have to know what you are doing. And YES, the first 3-5 will SUCK. all the short sales there after will seem easy. Thats the learning process.

3) As you will read in the blog post the Treasury Department is going to offer lenders/ borrowers etc 'incentives' to do short sales. You know about cash for keys? Well, expect to see 'cash for keys via a short sale'.

4) The banks the politicians are at the end of their ropes. They have been playing 'extend and pretend' for nearly 2 years. They have intentionally been dragging out the foreclosure process etc hoping that the market would turn and they could lose less...they have no given up on that.

5) (I know I will get flack for this)...there aren't 5,000,000....not 7,000,000 bank controlled 'Shadow Inventory' homes...there are 13,000,000. That number includes the homeowners who have missed 2 payments....and have a 90%+ chance of losing the home to foreclosure (unless they are smart and list/ sell with an agent who knows how to do a short sale!)

Anyway, the bottom line is that agents who know how to list and sell short sales will control the market going forward. Obviously, REO agents will be very busy as well. This is the market, this IS the new normal.

If I can help any of you with anything....student or not...please ask.

Tim

Every file that comes across my desk goes in for loan modification to the banks. It is there that I know that certain ones will be denied. However, a good percentage have adjusted their payments and are on course. I get updates bi-weekly on the files. I recognize that there is a good percentage of loan mods that will default. That is given. But, I think the issue of recourse and non-recourse will be popping up more and more.

I second Tim's post.

I think the process will work..-

I would love to process loan mod for these homeowners and list their property short sale if loan mod won't work. It will save lots of money paying attorneys to this work.

As most of already know, the short sale process definitely needs help! Unfortunately this is not going to be a quick fix.

This is good to know. Thanks for sharing!

"BORED WITH YOUR CURRENT JOB?" Nah, I'm bored with my current pay in doing my job.

You did a good job with this, Martin... if Tim & Julie didn't present the facts of the matter. I encourage everybody to read what the facts are. I think you'd be surprised. Tim's a smart cat in a dog eat dog world.

OCT

2009

Great Post- lots of information. It will be interesting to see what the final new "rules" turn out to be. I agree with alot of the comments here that banks should not decide on how long the listing period is. I do think it would be great to know up front what the least amount the bank would accept actually is! That might be different than the bank setting the listing price but it's really what we need to know before putting the time and effort into attempting a short sale.

Hmm, I just curious about whether or not any Realtors or anyone from NAR has been working with those who've come up with these new regulations. I seriously doubt it. Thanks for this post, Martin, very useful information as well as everyone's comments.

I think standarization and rules are good if they improve a situation. And yes, it might be good for the banks to agree to a price upfront. But I see a lot of problems and like Katerina, I could go on about them forever. The main thing is that the guidelines do not really address the problem of how long the bank takes. And, in fact, they will probably make it take even longer because now the homeowner has to attempt a loan modification first before they can do a short sale.

And how are we as listing agents going to do a new short sale now. Are we going to help our client with a loan mod first? I am not in that business, and most of them cannot or will not do it themselves.

That is a lot of good information I am going to go read up on it all some more...sheesh, I can't keep up anymore with all the changes everywhere~

OCT

2009

Looks like we all have a little "continuing education" to complete. That is whats great about this profession, continual change to keep us on our toes.

Great info Martin! It will be nice to have some consistency and a price and time line at least to go by. It sounds like the way Wachovia is already handling their short sale process.

Thanks so much,

DeeDee Riley

OCT

2009

Someone else brought up a stickler point about must refi or modify. If they've lost their job & just want to sell, let em sell and get on with their lives. Hopefully they are not going to force people to refi and create a cycle of this stuff?

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