FHA - Out with the old, in with the new... Pre-Foreclosure Short Sale Guidelines

As you may know, I recently posted about the FHA Short Sale Guidelines that were changed on 12/24/2008.  I have two points to discuss today.  The gap and the direction.

The Gap
The old FHA short sale guidelines permitted a sale which would net the lender at least 82% of the "as is" market value determined by an FHA appraisal.  The new guidelines have a tiered scale beginning at 88% and ending at 84%.  If the home is sold within the first 30 days of the approval to participate in the program, the offer must net the seller's lender at least 88% of the market value after all closing costs, real estate fees, liens etc. have been paid.  During the 2nd month, the threshold is dropped to 86% and after 60 days on market, it drops to 84%.

So you might be thinking, "Well that's not so bad.  What's a couple of percent here or there?"  I didn't look at it from that perspective.  I have closed a lot FHA Short Sales and it doesn't take long to figure out that a buyer is getting the property at about a 10% discount with the good old 82% rule.  After rolling up 6% in real estate commissions, about $1,000 to the seller and general closing costs, you are left at approximately 90%.

Under the old guidelines, the 82% rule equated to an 18% discount to the lender's net on the "Mark to Market" value.  Remember, the numbers are not based on the loan, but on the current value.  If the lender raises that bar by 6%, that is a 33% reduction to the discount that is available to a buyer.  Well, not really.  Remember that 8% of the 18% is closing costs and those are a fixed variable that come right off the top.  The 6% difference comes out of the remaining 10%.  This actually equates to a 60% increase on the gap.

The Direction
It amazes me that 350 Billion flew out the window with no accountability.  This is the first day (1/20/2009) of the new administration, so I suspect the 2nd 350 Billion is about to follow.  It certainly doesn't appear that much of the money made it to the FHA homeowners who are facing foreclosure.  This certainly appears to be a move in the wrong direction.  I could easily rattle off a list of FHA homeowners that we have worked with in the past who never would have completed the sale under these terms.  The homes would have gone to auction.

Everyday homes are selling at a 10% discount as it is.  Why in the world would a buyer ever want to involve themselves in the short sale process for a measly 4% discount on market value.  I certainly wouldn't.  Additionally, because the homes are sold as it, success if much more difficult without a larger discount.  Obviously the appraisal is supposed to accommodate these repairs into the price.  However, no homeowners typically takes a dollars to dollars discount on work that will have to be done out of their pocket on their time.

As an example, if a buyer determines that the carpet is bad, they natually assume the expense of replacing it will cost them double what it really will.  By default, they will expect a $3,000 discount for $1,500 worth of carpet.  This is typically related to ignorance of carpet pricing.  When it is not, it is related to the fact that they wishes to roll that in over the 30 year mortgage instead of paying for it out of pocket.  Of course the PITA factor to the buyer for dealing with it in the first place is always an issue as well.

They are finally allowing the buyer's to roll in up to $1,000 of closing costs if they are purchasing the FHA short sale with a new FHA loan.  I personally have no problem with this.  However, I thought they had determined that the buyer(s) needed to purchase the home with their own money in order to reduce the likelihood of a future defaulting loan.  So I can only guess in their minds, it's still worth risking the possibility of another future delinquent mortgage in order to get a closing today???

What do you think?

Brad Brusenhan on Twitter @ ShortSaleGuy