Special offer

Giddy-Up Short Sale Process!

By
Real Estate Appraiser with PahRoo Appraisal & Consultancy

Last week, the federal housing regulator, FHFA and mortgage-finance companies Fannie Mae and Freddie Mac announced that it will employ new short sale guidelines for banks to follow as part of the Federal Housing Finance Agency’s Servicing Alignment Initiative. The guidelines are supposed to make the sale of underwater homes easier for homeowners, including helping people who have financial difficulties but haven't missed mortgage payments, and make the process more efficient for homeowners and servicers.

Traditionally, in a short sale process, holders of first and second mortgages, such as home-equity loans, negotiate with a home owner.  In this case they accept less money than is owed to them in order to facilitate an easier and quicker sale of a property that is facing risk of falling into default and going into foreclosure. Typically homes that sell in the short sale process incur a 10% loss as opposed to the 30% loss incurred by those that go into foreclosure. While there is a consensus that short sales benefit not only the home owner, they also benefit the lending industry and the economy as a whole. The process is lengthy and complicated as banks bargain over how much of the proceeds they would get from a sale. One of the issues the guidelines addresses is trying to eliminate the question of how to divide money by limiting what second lien holders can get to a maximum of $6,000. The second lien holder will still reserve the right to reject the sale if they so wish.

It is estimated that about 4.6 million borrowers with loans backed by Fannie or Freddie are underwater, with 80% of them having missed no mortgage payments, and therefore eligible for the program. There are those who fear that while banks can often absorb high losses, regulatory changes to residential mortgages could compress losses into a short period and cause problems for the banks.  This could be especially beneficial in cities like Chicago where the foreclosure process is taking nearly 600 days and short sales could dramatically curb the shadow inventory.

 Michael Hobbs, PahRoo Appraisal & Consultancy

Twitter @Pahroo

We're Hiring: 2 residential real estate appraisers (Chicago or suburbs)

Comments (1)

Jim McNinch
Trademark Loss Mitigation - Spring, TX
Short Sale Specialist, Texas

You are correct that a lender will make more money on a short sale.  The most frustrating part, however, is when the lender denies a contract for being too low, forecloses, than 6 months later ends up selling the property as a REO for less than the short sale contract.  Go figure.

Sep 01, 2012 03:10 AM