New Short Sale Guidelines Take Effect

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

This week, short sales will become somewhat easier for struggling homeowners, as new short sale guidelines have been put into effect by the Federal Housing Finance Agency for the government-sponsored enterprises Fannie Mae and Freddie Mac.

Since their initiation, these regulations influence on mortgage servicers has proven to be beneficial, considering the intent of the program is to escape foreclosure and will provide aid to borrowers, servicers, and the real estate market in general, says senior executive Ghazale Johnson of Accenture Credit Services.

According to Johnson, the most troublesome delay within the short sale proceedings has been to obtain the various approvals necessary to complete the transaction. Due to the high percentage of delinquent loans with mortgage insurance, the mortgage insurance providers backing this sale has become an essential part of short sale approval.

Johnson additionally stated that if the new guidelines can ease and expedite the approval process and aid servicers in pushing the short sale process forward, this new provision should assist in relieving the significant backlog of delinquent mortgages.

Short sales provide homeowners going into default with a more practical option than simply allowing the property to be foreclosed. In addition, short sale homes are generally in much better condition with less damage than foreclosed properties, whether as a result of intentional damage caused by disgruntled homeowners or from break-ins. Critics of these new guidelines have argued that the $6,000 cap on second-liens is excessively low, especially for borrowers with debts exceeding five figures. As a result, second-lien holders may attempt to recover by holding onto the debt but will now be forced to compromise for less compensation.

According to Morgan Stanley researchers, among the critics of these changes, second lien trades for defaulted first liens often only trade within a range of 10-15 cents per dollar. These researchers also noted that the $6,000 cap tends to benefit the higher end of the current market.

 However, with the new agreements expediting the process of closing short sales, many realtors and prospective buyers will be likely to endorse these changes quickly.

Johnston stated that this agreement will provide additional incentive for borrowers to consider short sale properties for purchase and aims to demonstrate that financial institutions who administer short sales would also benefit from streamlining the procedure.

While Johnston sees these changes as a step in the right direction, he believes that improvements could be more effective. According to Johnston, although these changes relieve some of the burden of the short sale transaction, other steps could also be improved, including approval from third parties such as second lien holders. However, despite the challenge which short sales still present, borrowers should be more equipped to deal with this challenge following the installment of these new guidelines.