New FHFA Guidelines to Streamline Short Sale Process
On August 21, the FHFA announced new short sale guidelines for loans backed by Fannie Mae and Freddie Mac. The guidelines, which go into effect on November 1, are part of FHFA's Servicing Alignment Initiative, which is intended to streamline short sales and other loss mitigation efforts.
For borrowers "most in need," the new guidelines reduce or eliminate the documentation required to demonstrate that need.
For borrowers with hardship due to changed circumstances, the new guidelines are designed to expedite the short sale approval process. For example, borrowers who need to relocate more than 50 miles from home due to a job transfer or a new employment opporutnity will qualify for a short sale.
One other item of note: borrowers who conduct a short sale on a property backed by Freddie or Fannie will not be eligible for a new Freddie or Fannie-backed loan for two years.
Interestingly enough, even though FHFA Director Ed DeMarco is very much against principal reductions for borrowers, Fannie and Freddie will waive the right to pursue deficiency judgments in exchange for cash contributions. It appears that servicers will evaluate borrowers to see whether they can contribute any funds to make the sale less "short." Although a short sale does not involve keeping the home, having the deficiency waived effectively acts as a principal reduction -- Fannie and Freddie will take a loss on the difference.
While this may seem like one of the main benefits of these new guidelines, the Mortgage Forgiveness Debt Relief Act expires at the end of this year. Since the new guidelines won't take effect until November 1, there will be very few short sales that qualify for the tax exemption the Act provides. According to David Dayden, there is legislation pending in Congress that would extend the Act, but it has a long way to go before becoming law.
At the end of the day, it remains to be seen whether the new guidelines will streamline short sales or make them more attractive to underwater homeowners. This could just be an attempt to take eyes away from the recent articles lambasting the Administration's housing policy. No matter what, the new guidelines will not change the fact that every situation is different -- a short sale may not be the best solution for a given situation. Before jumping feet first into the short sale market, it is wise to consult with an experienced attorney.