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New FDMC Guidelines Mean Streamlined Automatic Short Sale Approvals

Seattle Short Sales - Thursday, November 01, 2012

New FDMC (Freddie Mac) guidelines, which take effect today (November 1, 2012), will streamline the short sale process even more, and will allow loan servicers to issue automatic short sale approvals - without having to bring the file to the investor or the mortgage insurer. These new Freddie Mac short sale approval guidelines were drafted in cooperation with FNMA (Fannie Mae) and FHA, who will also apply them - which means that they will apply to the majority of Americans who have a home mortgage.

The aim of Freddie, Fannie and FHA in bringing in these new guidelines is to streamline the whole short sale process by putting the decision-making authority back to the loan servicers. If homeowners meet certain baseline criteria, the servicers are now authorized to approve a short sale themselves, without ever having to bring the file to the investor. We’ll go through all of the significant details of these changes below - but the important thing to understand is that this is great news for anyone considering a short sale, because it means that a part of the process that slows things down has been eliminated. Short sales will be both simpler and faster.

The key difference between the previous system, what Freddie calls the “classic short sale,” and the new guidelines for a “standard short sale” is that servicers are delegated to approve short sales, without having to refer the file to the investor, provided that the following requirements are met:

  • the homeowner is 31 or more days delinquent on mortgage payments
  • the homeowner is current, or less that 31 days delinquent, but has undergone one of the four eligible hardships.

The four eligible hardships are:

  • divorce or separation
  • death of the borrower or the primary wage earner
  • long-term permanent disability of the borrower or dependent family member
  • distant employment transfer or relocation (including PCS for service members)

However, if a borrower is current and does not meet one of the four eligible hardships, and the servicer still feels that they should be considered for a short sale, the servicer may still send the file to the investor to review. In other words, if the borrower doesn’t meet the criteria above, they still may be approved for a short sale - just the servicer does not have the authority to approve it without passing it to the lender.

For borrowers who are 31 or more days delinquent, all property types are eligible for the servicer-approved “standard short sale” - including primary residences, investment properties, and second homes. However, for borrowers who are current or less than 31 days delinquent, the home must be their primary residence, and their monthly debt-to-income ratio must be greater than 55% (service member with PSC orders are exempt from this last requirement).

Freddie Mac will provide guidance in choosing a listing price, based upon a BPO (Broker’s Price Opinion) that is to be undertaken as early as possible in the short sale process. That listing guidance is to be passed to the borrower and broker through the loan servicer, but it is up to them to choose the final listing price. The transaction must, after deducting commissions and other closing costs, meet Freddie’s minimum net proceeds requirements in order for the approval to be issued. It is important to note, that the suggested listing price based upon the BPO may not necessarily meet Freddie’s minimum net proceeds requirement.

Other aspects of the “standard short sale” guidelines that are not new include guidance on timelines:

  • servicers must acknowledge receipt of the purchase offer within three days
  • servicers must respond with a decision within 30 days, or with an explanation for the delay, allowing them up to 30 more days
  • if servicers require the delay, they must provide the borrower with weekly updates
  • if servicers counter the offer, 15 days are allowed for this process

Requirements about the short sale deal being an “arm’s length transaction” have not changed, but Freddie now provides servicers with a template form to assist them with this requirement. Homes may not be resold for 30 days following the short sale, and they may not be resold for a value more than 120% of the short sale purchase price for 90 days (this clause is to prevent fraudulent “flipping” transactions with two buyers).

If the requirements above are met, and the borrower has acted in good faith, Freddie Mac does not pursue the borrower for the deficiency. This means that the amount that the balance owing was discounted by when the mortgage was paid out following the short sale - which is often in the order of $100,000 - is permanent debt relief for the borrower: their lender will never pursue them to pay that discount back.

The “standard short sale” program has a lot of similarities to the government’s HAFA program - so Freddie will be phasing out their participation in HAFA at the end of this year. As for HAFA the “standard short sale” program will allow up to $3,000 in relocation assistance for the borrower upon completion of the transaction - but it is important to understand that this is total relocation costs. For example, if a new employer is contributing $1,000 to relocation costs, then Freddie will contribute a maximum of $2,000. Also similar to HAFA, through the “standard short sale” program, lenders may allow up to $6,000 total towards subordinate liens; junior lien-holders may not receive anything from the borrower.

As we've noted, this is great news. Short sale approvals are up, and the time to process them is already down from a year ago. These changes will streamline the short sale process even more, and make the approval process even faster.

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