New short sale process offers hope to struggling borrowers

by Ethan Handelman, National Housing Conference

It should soon get easier to do short sales—welcome news for underwater homeowners looking to sell. The Federal Housing Finance Agency (FHFA) announced today that Freddie Mac and Fannie Mae are issuing a consolidated set of short sale guidelines to their mortgage servicers. The changes promise to make short sales quicker to process and with fewer separate approvals needed, making them a more useful tool for preventing foreclosures and reducing the housing debt burden. Quick, fair, and effective implementation is critical.

Changes as summarized by in the FHFA announcement:

• Reduced or eliminated documentation of need required for borrowers who have missed several payments, have low credit scores, or have serious financial hardships. 
• Quicker processing for borrowers who are current on their payments and are experiencing hardship qualifications such as death, divorce, disability, or distant employment transfer or relocation. Servicers can process these without separate Fannie Mae or Freddie Mac approval.
• Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make cash contributions or sign promissory notes.
• Service members with Permanent Change of Station (PCS) orders will be automatically eligible for short sales without any obligation for the shortfall.
• Consolidated program with clearer processing guidelines.
• Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders to expedite a short sale. Previously, second lien holders could slow down the short sale process by negotiating for higher amounts. (It is unclear from the summary whether this is a cap or how effective it will be in reducing delays from second lien holders.)

These guidelines, if implemented well, could well be an important step forward for struggling borrowers. Previously, FHFA had only permitted Fannie Mae and Freddie Mac to reduce payments for struggling borrowers via principal forbearance, but it had forbidden a reduction of principal. If the short sale process is applied fairly and transparently via the updated guidelines, it provides, in effect, a way to reduce principal. Although it is likely not as effective as shared appreciation modification for many borrowers, an effective short sale process combined with principal forbearance is a workable second choice. Implementation will be critical—this will only make a difference if Fannie Mae, Freddie Mac, and their mortgage servicers implement it in a timely, fair, an effective way.