Short Sales DO NOT Require a Delinquent Mortgage – “Imminent Danger of Default”

By
Mortgage and Lending with iLoan - NMLS ID#4474 NMLS 79048

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.

Posted by

Charles Dailey - Branch Manager, Loan Officer, Certified Military Housing Specialist - iLoan - NMLS ID# 79048 -  612.234.7283 - charles@charlesdailey.com


Search Real Estate

The Home Buyers Scouting Report® is provided directly to the buyer by HBM II, a licensed national real estate brokerage service company, not to or through a lender. The FREE home finding service is provided directly to prospective homebuyers by HBM II and its real estate brokers, as part of their ordinary real estate brokerage services. HBM II, Inc. works cooperatively with other real estate agents across the United States in attempting to find ready, willing and able buyers for homes listed for sale. The role of the Preferred Loan Officer is to assist in determining a comfortable home price range for Home Buyers Marketing II, Inc. (HBM II) to use when it is searching for property listings within the buyer's search criteria.

close

Re-Blogged 14 times:

Re-Blogged By Re-Blogged At
  1. Fernando Herboso - Broker for Maxus Realty Group 01/07/2010 09:38 PM
  2. Diane Williams 01/07/2010 10:33 PM
  3. Jason Crawford, MBA 01/08/2010 02:51 AM
  4. Jason Crawford, MBA 01/08/2010 02:52 AM
  5. Steven Graham 01/08/2010 05:22 AM
  6. Gene perez 01/08/2010 06:12 AM
  7. Bridget Cella 01/08/2010 12:16 PM
  8. Christopher Webster 01/08/2010 12:54 PM
  9. Damon Gettier 01/08/2010 01:29 PM
  10. Andrew Monaghan 01/08/2010 02:15 PM
  11. Roland Woodworth 01/08/2010 04:02 PM
  12. D B 01/08/2010 11:24 PM
  13. Lanora Campbell 01/10/2010 11:25 PM
  14. David John Medendorp 04/07/2010 02:35 PM
  15. David John Medendorp 04/07/2010 02:35 PM
  16. Steven Brand 12/28/2010 04:34 AM
Location:
Minnesota
Groups:
Minnesota's Nice :)
Short Sales Specialists
The Ninety-ninth Percentile
Advice for Sellers
Minnesota Real Estate
Tags:
default
freddie mac
qualifying
hardship
fannie mae
short sale
imminent danger of default

Spam prevention
Show All Comments
Rainmaker
75,812
KAREN THOMPSON, GRI, REALTOR
KTHOMES, LLC - Frederick, CO
Colorado Homebuyer Pro

Yes in the HUD Mortgagee Letter 2008-43 regarding Preforeclosure Sales (Short sales) it does indeed state that the loan must be in default or delinquent for more than 30 days, but then right after that is says that the "Mortgagee may exercise their discretion to accept applications from mortgagors who are current buy facing imminent default".  Good luck with that happening. 

Jan 08, 2010 11:10 AM #30
Rainmaker
76,436
Bridget Cella
Re/Max Connection - Sewell, NJ
e-Pro, Realtor

President Obamas plan that will take place in March will hopefully alleviate some of these issues.  Streamlining Short Sales, allowing home owners who have short saled to buy soon after, etc.

Hopefully this will help.

Jan 08, 2010 12:16 PM #31
Rainer
163,775
Howard and Susan Meyers
The Hudson Company Winnetka and North Shore - Winnetka, IL

Charles...Thanks for another great post.  It's been discussed before, but it still remains incredible that lenders have not found a much more efficient and fair method for dealing with short sales.  Wouldn't all parties benefit?  At a time when over 30% of homeowners are under water on their mortgage,  it should be clear to the lenders that this problem is not going away.  Let's hope these new programs provide some real solutions.

Jan 08, 2010 01:24 PM #32
Rainmaker
354,349
Damon Gettier
Damon Gettier & Associates, REALTORS- Roanoke Va Short Sale Expert - Roanoke, VA
Broker/Owner ABRM, GRI, CDPE

Charles, this is a great blog worthy of me reblogging.  Thanks!

Jan 08, 2010 01:30 PM #33
Rainer
12,240
Dawn Uselding
A New Dawn Real Estate Services, LLC - Manitowoc, WI
Short Sale Assistant

Great Blog Charles!  I as well have closed short sales where the seller is current.  But not many.  Usually they are court ordered sales in divorce proceedings and transfers for employment purposes.  I have also had several military transfers that resulted in short sales while being current.

Again, good post.

Jan 08, 2010 01:49 PM #34
Ambassador
2,004,665
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

It would be helpful if more of the banks, servicers and investors would follow this iminent default concept.  It would allow at least some of those in need of help to get help without wrecking their credit in the first place.

Jan 08, 2010 03:33 PM #35
Ambassador
626,634
Roland Woodworth
Q Realty - Clarksville, TN
Q Realty - Power In Real Estate

Great information.. Now if all the lenders would simple approve.

Jan 08, 2010 04:00 PM #36
Rainmaker
1,345,053
Cheryl Ritchie
RE/MAX Leading Edge www.GoldenResults.com - Huntingtown, MD
Southern Maryland 301-980-7566

I had a case this summer where there were no late payments and it was approved due to forthcoming divorce and inability to repay.

Jan 08, 2010 11:04 PM #37
Rainmaker
162,904
Deanne Olivas
Keller Williams Realty East Valley - Tempe, AZ
Your Home Matters

Thank you for all the info. I am still confused. I am taking my first short sale where the owner is not behind on their payments. The wife has lost her job and they know they cannot keep the home. Obvivously, I need to do more research. It makes no sense to me that they should have to ruin their credit more with late payments.

Jan 09, 2010 12:26 AM #38
Ambassador
769,680
The Somers Team
The Somers Team at RE/MAX Access - Philadelphia, PA
Real People. Real Dreams. Real Estate.

Great post and timely !  I will be meeting with a seller today who will fall into this situation.  With him, he will either do a short sale or stop making the payments.  We will see what happens !

Jan 09, 2010 12:32 AM #39
Rainer
14,778
Paul Durney GRI
Watson Realty Corp - Lake Mary, FL

I hate to sound so cynical but since when are banks supposed to know the regulations......would we have gotten into this mess if banks and mortgage brokers had followed guidelines?

Jan 09, 2010 01:32 AM #40
Ambassador
1,398,733
Erica Ramus
Erica Ramus - Ramus Realty Group - Pottsville, PA - Pottsville, PA
MRE, Schuylkill County PA Real Estate

This is a maddening system. How can we fix it?

Jan 09, 2010 02:08 AM #41
Rainmaker
155,183
Ted Tyndall
Davidson Realty Inc. - Saint Augustine, FL
I will help You find the Home YOU want to Buy

Thanks for the post. I have a meeting Monday with a customer asking this same question.

Jan 09, 2010 07:08 AM #42
Rainer
34,614
Scott Taylor
Realty Center - Orlando - Ocoee - Orlando, FL
REALTOR

The requirement by some lenders that you must be in default can't help the stats on lis pendens filings!!

Jan 11, 2010 03:46 AM #43
Rainer
1,568
Jim Lankes
Lankesgroup powered by HomeSmart - Scottsdale, AZ

Our team is closing dozens of short sales where the borrower is current. We have been successful in demonstrating that the property is insolvent, (not the borrower)... This is a compelling enough reason for the lender/investor to approve the short sale. In the end it is the best business decision for the bank.

Jan 12, 2010 12:26 PM #44
Rainer
57,956
Cheri Smith
Total Property Resources - Bend, OR

This is all so confusing! Now that Freddie Mac is participating in HAFA, is seems to me they require the borrower to be 60 days delinquent to be eligible: "Fred Eligibility…60 days late and have cash reserves less or $5,000 or 3 times their monthly mortgage."  Read more here: http://www.freddiemac.com/singlefamily/service/docs/hafa_bulletin_fact_sheet.pdf

 

Jul 08, 2010 10:04 AM #45
Rainer
185,563
Patti Lyles
Century 21 Showcase, REALTORS® - Santa Cruz, CA
DIVORCE, SHORT SALE, FORECLOSURE SPECIALIST

Charles, Just like Bryant Tutas (BTW:He is a Great Resource for learning how the stop clowning around in this Short-Sale Circus)  I have closed 2 deals this year where the Seller never missed a payment.  You may also like to know that 90 days after the deal closed the Seller checked their  FICO score and it only fell 70 points. When I took the file they had a score of 782. Others Sellers that didn't listen to me suffered by triple digits. One was dinged by 200 points.   

Aug 07, 2010 02:54 PM #46
Anonymous
Christie

I just listed my property and it will be a short sale - I have Freddie Mac and I am current.  I noticed that one of the links says that Freddie Mac requires loans to be at least 31 days in default - is this true?  I am going to skip one month mortgage so it looks like I am in default - what does that do to my credit?  If the short sale gets approved, what happens to that late payment?  Does it get wiped out because of the short sale?  Help!  THanks!

Aug 18, 2010 04:26 AM #47
Rainmaker
1,085,434
Greg Nino
RE/MAX Compass, formerly RE/MAX WHP - Houston, TX
Houston, Texas

powerful stuff to arm yourself with. I love these types of posts. Thanks so much for sharing. We're always learning!

Dec 28, 2010 04:52 AM #48
Rainmaker
1,437,319
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • Green • GRI • HAFA • PSC Calabasas CA

well, it is a big news: sellers don't have to be in default anymore to do a government short sale! 

Great news that we all must share:)

Aug 22, 2012 04:04 AM #49
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainer
127,382

Charles Dailey

How Can I Help You or Your Client?
*
*
*
*
Spam prevention

Additional Information