There is a lot of hub bub around the new HUD changes to FHA short sale rules that went into effect on October 1, 2013. Specifically these requirements are set forth in the most recent Mortgagee Letter 2013-23 and this letter in a fair amount of detail states certain requirements that were already known to those of us in the short sale industry in order to get a short sale approved, but apparently they are now putting them in writing.
New HUD Rules For FHA Short Sales, Requirements Include;
1. A seller cannot list the property with or sell it to anyone with whom they are related or have a close personal or business relationship. In legal terms, it must be an “arm’s-length” transaction.
a. The revised FHA short sale addendum must be signed and dated by all parties. Under this addendum, all parties agree that the subject property must be sold through an arm’s-length transaction. An arm’s-length transaction is defined as a short sale between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment. Also, no hidden terms or special understandings can exist between any of the parties (e.g., buyer, seller, appraiser, sales agent, closing agent, and mortgagee) involved in the transaction.
b. This has been long known as a requirement for short sales. Try as they may a seller can’t have their relative list their short sale. Why? Because the FHA doesn’t want the commissions it pays to the agents involved to go back to the seller and they know that some of that commission is likely to if a relative lists the home. Doing this would directly violate the language in the arm’s length transaction affidavit.
c. The seller can’t have a business relationship because they don’t want the seller renting back the home, staying in the home or have any agreement for the seller to buy back the home at a later point in time. I am surprised how many homeowners keep asking me in consultations if they are able to do this or tell me that a realtor who contacted them after an NOD told them this was possible. The answer is of course no, at least where a lender will require the short sale to be an arm’s length transaction (and most do). A short sale means you sell your home, you move out and you don’t look back.
2. Any knowing violation of the arm’s-length requirement may be a violation of federal law.
a. AKA short sale and mortgage fraud with hints of wire and mail fraud, don’t do it. Sellers, buyers and their agents are required to sign the arm’s length transaction affidavits certifying under penalty of perjury that they are not aware of any situation that would violate any terms of the agreement.
3. A seller’s mortgage must be in default, on the date the short sale transaction closes.
a. Again this has been long known in order to get a short sale approved, it can be hard to establish or show a hardship when you are paying your mortgage and potentially all of your other bills.
b. There are exceptions to this for certain situations.
4. Before closing, any additional liens against the property must be released. A lien holder who demands a payment to release its lien must submit a written statement, and an agreement to release the lien if that amount is paid.
a. Another long known, you can’t convey legal title to the buyer if liens remain on the property that have not been released by paying them in full or settling them. Typically that means the lien holder will have issued a written statement and agreement to release the lien if a certain amount is paid.
5. For FHA’s “standard pre-foreclosure sale” (standard PFS) servicers must use a Deficit Income Test (DIT) to determine a homeowner’s financial hardship. The IRS Collection Financial Standards is used to verify homeowners expenses not reflected in their credit report. Only owner-occupied properties are eligible for the standard pre-foreclosure sale.
a. The DIT assists the mortgagee in determining whether a mortgagor is experiencing a hardship by performing the DIT which is calculated by subtracting total monthly expenses from total monthly net income. The DIT is used to determine if a mortgagor can sustain his/her mortgage or if a mortgagor is experiencing a hardship that may qualify the mortgagor for a standard PFS. A DIT yielding a negative amount would indicate that the mortgagor’s expenses exceed his/her income each month and, thus a PFS may be an appropriate loss mitigation tool for the mortgagor if a loss mitigation home retention option is not viable.
b. The DIT requires that the lender verify the mortgagor’s monthly net income by obtaining one of the following;
i. at least two of the mortgagor’s most recent pay stubs or, if self-employed, the most recent quarterly or year-to-date profit and loss statement, compiled by a Certified Public Accountant (CPA);
ii. Social Security Income (SSI) statements and/or disability payment statements, if applicable;
iii. The most recent Form W-2, Form 1099, or Federal Tax Return.
c. Verify the mortgagor’s monthly expenses by ensuring that all expenses on the mortgagor’s credit report are factored into the DIT along with any other expenses that are supported by bills, payment receipts, and/or the standard payment amounts (e.g., for utilities) under an IRS Index (such as the IRS Collection Financial Standards).
6. Homeowners who are eligible for a “streamline” preforeclosure sale may not be required to submit financial information or have a financial hardship. Principal residences, second homes, investment properties, and service members who have received Permanent Change of Station (PCS) Orders are potentially eligible.
7. Appraisals of the subject property shall be completed within approximately ten business days.
a. I wonder if that means that the appraiser will be required to submit their report within those 10 business days or just perform the appraisal. My guess is it just means the appraisal has to be performed within 10 business days of the order being placed. Often the appraisal may be physically done but then it takes weeks for the appraiser to actually submit their report. It is frustrating when that 90 day clock that the appraisal is good for is already ticking and you don’t know how long the file will be under “review.”
8. Here is the biggie. AS A NEW CONDITION, ONE MIGHT BE REQUIRED TO MAKE A FINAL PAYMENT (SOMETIMES CALLED A CASH CONTRIBUTION) BEFORE CLOSING. THIS PAYMENT WILL REDUCE THE DEFICIENCY BALANCE.
To continue reading about how this appears to be a violation of California law C.C.P 580(e) please continue reading our blog.
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