Clearly, many if not most short sales involve a loan presently in default. As well, many times a short sale might involve a current borrower who can currently afford the payment. In several other situations, a seller may be “just hanging on” and the smallest thing could put them irreparably behind on their loan. Welcome to “eminent danger of default.”
In a hardship letter for a short sale (also known as short payoff), if a borrower/seller is currently not in default but can justifiably make the case that it is nearly unavoidable despite their willingness if circumstances were otherwise, they can proceed to conduct a short payoff/short sale (pursuant to Freddie Mac’s Single-Family Seller/Servicer Guide, Volume 2 Chs. 64-69: Servicing Nonperforming Mortgages Chapter B65: Workout Options B65.37: Eligibility requirements (08/20/09) – this can be viewed by going to http://www.freddiemac.com/singlefamily/ and searching the AllRegs link). I'm referencing Freddie here buy the GSE's (or government owned entities) typically dance to the same tune.
Specifically, to be eligible, Freddie requires that the borrower:
1. Be experiencing or have experienced an involuntary inability to pay, unless the Mortgage is secured by a Manufactured Home and the Borrower has a buyer for the property
2. Be delinquent in his or her payments, or in imminent danger of default
3. Complete Form 1126, Borrower Financial Information
4. Be cooperative and allow access to the interior of the property for a BPO
5. Have had the property listed by a real estate broker at a price based on a market sales comparison using the as-is value with a 90-day marketing timeframe
6. Make the maximum possible contribution toward any deficiency from the sale in cash and/or a promissory note (though this will largely be governed by HAFA after April 5, 2010)
7. Not have entered into a program or arrangement where a third party takes title to the property and arranges a short payoff in exchange for a fee
8. Waive reimbursement of any Escrow, buydown funds or prepaid items and assign any insurance proceeds to us, if applicable
Interestingly, Freddie Mac maintains the requirement to be late for loan modification purposes. It doesn’t matter if default is eminent in this situation. To modify they have to have current income, be late on their payments and have to not be eligible for the Freddie Mac Relief Refinance (in that unlikely event that they qualified and were late on their mortgage).
It would therefore be wise to take a considerable amount of time in crafting the hardship letter appropriately to define the case for eminent default if such a situation exists (wise in any case but especially where the loan is current). Loan servicers will be evaluating income to be sure that the mortgage payment, expressed as a percentage of the gross income, is meaningfully in excess of 31% or they’ll be looking for significant life changes such as the loss of a job or something of that nature. If such situations exist, according to Freddie Mac’s instructions to its loan servicers, a borrower may proceed to a short payoff without being currently in default.
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