Fannie Mae and Freddie Mac (Streamlined and Standardized) Short Sale
- While the property is on the market and while the transaction is being negotiated, the foreclosure process may move forward.
- The servicer will determine if the foreclosure process should be suspended based upon how much time prior to the foreclosure sale date the package is received. The listing agent or the borrower’s/seller’s attorney should verify whether the foreclosure sale is being postponed.
- Once the short sale has been approved, the servicer must suspend the foreclosure sale to allow the short sale to close.
Non-GSE Traditional Short Sale
The foreclosure process may move forward while the property is on the market or offer is being negotiated. The timeline could continue even after the short sale has been approved. It is imperative that the listing agent or the seller’s attorney work with the servicer to stop the foreclosure clock from reaching the point of a forced sale (foreclosure) to allow the short sale to close.
FHA Pre-Foreclosure Sale (PFS)
Once the borrower has been approved to participate in the PFS program, FHA will allow a postponement of the foreclosure sale for 120 days.
VA Compromise Sale
It is imperative that the listing agent or the borrower’s/seller’s attorney work with the servicer to stop the foreclosure clock from reaching the point of foreclosure to allow the short sale to close.
Some of the short-sale programs have guidelines for assisting the borrowers/sellers with relocation expenses along with caps on what the servicers can require from them as cash contributions.
Fannie Mae and Freddie Mac (Streamlined and Standardized) Short Sale Contribution Requirements
The servicer must not request cash contributions and/or promissory notes where applicable law prohibits a borrower/seller contribution or if a borrower/seller:
- Qualifies for streamlined documentation, or
- Is an active duty military service member of the U.S. armed forces with PCS orders relocating the service member from the subject primary residence purchased by the borrower on or before June 30, 2012.
Cash Contributions, Incentives, and Subordinate Liens
When the short sale is done under the imminent default standard, the servicer will evaluate the borrower/seller for the capacity to make a cash contribution if triggered by the borrower/seller cash contribution test described in the following section.
- The servicer will evaluate the borrower/seller for the capacity to contribute only if triggered by the borrower/seller cash reserve levels or future debt-to-income ratio tests described in the following section.
- If the servicer concludes that a borrower/seller has the capacity for either a cash and/or promissory note contribution, the servicer must use the guidance described in the next section for setting an initial request. The borrower’s/seller’s total cash and promissory note contribution must not exceed the total amount of the deficiency.
Borrower Cash Contribution Test and Formula
The servicer has the ability to ask for cash contributions if assets such as cash, savings, money market funds, marketable stocks or bonds (excluding retirement accounts) stated on Form 710 are:
- In excess of the greater of $10,000 or;
- Six times the contractual monthly mortgage loan payment including principal, interest, and tax and insurance escrows (PITI).
If a borrower/seller has cash reserves of more than $50,000, the servicer will request written approval from Fannie Mae for the contribution amount. If the servicer determines that the borrower has the capacity to make a cash contribution, the servicer must initially request a contribution of 20% of the borrower’s cash reserves, not to exceed the deficiency. If the servicer has any thought that the borrower/seller has moved money to another account, e.g., a friend or relative, it will automatically stop the short sale.
- Promissory Note Test and Formula
- The servicer will evaluate a borrower/seller for a promissory note if the borrower’s/seller’s future debt-to-income ratio (“back-end ratio”) is less than 55%.
- The borrower’s/seller’s debt-to-income ratio is based on the borrower’s/seller’s future housing expense, which is calculated at 75% of the current payment.
- Relocation Incentive
- Owner-occupant borrowers/sellers who have no financial contribution requirements at closing will receive a $3,000 relocation incentive (unless there are employer or state funded assistance for moving).
- If the borrower/seller is 90+ days’ delinquent, no financial contribution will be required (owner occupied, second home or investor) and the borrower/seller will receive $3,000 incentive.
- Subordinate Liens
- Second mortgage payouts cannot exceed $6,000 total.
- If the second mortgage holder accepts payment, the second must release the borrower/seller from liability.
- Subordinate lien holders may not require a contribution from the agent or borrower/seller.
Non-GSE (Government-Sponsored Enterprise)
Traditional Short Sale
There are no specific guidelines on cash contributions, borrower relocation incentives, or subordinate liens.
FHA Pre-Foreclosure Sale (PFS)
- Cash Contributions
- Relocation Incentives
- Subordinate Liens
- All additional liens against the property must be released.
- A lien holder that demands a payment to release its lien must submit a written statement, and an agreement to release the lien if that amount is paid.
- HUD will allow an amount up to $1,500 for the discharge of junior liens.
VA Compromise Sale
- A borrower/seller who occupies the property as a principal residence and is required to vacate as a condition of the short sale or deed-in
-lieu may be eligible for $3,000 in relocation assistance.
- A tenant in the property may be able to claim the $3,000—no amount may be retained by the borrower/seller if the borrower/seller isn’t the one living in the property. (The tenant would have needed to be residing in the property as the principal residence as of the date the borrower/seller requested HAFA short sale or DIL or resided in the property on the date the executed real estate contract was approved by servicer.)
- If the property is owner occupied, the borrower/seller may use the $3,000 payment to pay for transaction costs that the borrower/seller has instructed the settlement agent, in writing, to pay on his or her behalf, such as the cost of legal representation in connection with the transaction, overdue utility bills on the property, or minor repairs made as a result of being identified during a property inspection.
- Borrowers/sellers may not use the relocation assistance payment for release of subordinate mortgage or non-mortgage liens recorded against the property and may not be required as a condition of the sale to utilize any portion of the relocation assistance to pay any transaction expenses.
- Subordinate mortgage lien holders with subordinate liens may be paid no more than an aggregate cap of $8,500.
- This cap does not apply to non-mortgage subordinate lien holders with subordinate liens not secured by a mortgage on the subject property, i.e., mechanics liens and HOAs.
- Subordinate lien holders must release the borrower from financial obligations relating to liens.
- Subordinate mortgage holders may not require contributions from either the borrower or real estate broker as a condition for lien release.
- All payouts must show on the HUD-1.
If you are working a Fannie Mae short sale and you have one of the following issues you will need to escalate the short sale:
- The offer has been submitted more than 30 days prior and there is no response.
- A problem arises with a contract and you are in negotiations with the servicer.
- There is a policy issue with the handling of your short sale.
- If you need to contest value (if no offers are being received OR there is an accepted agreement and there are value issues).
The escalation process is outlined at homepathforshortsales.com.
You will need the same information that was required under “Contesting a Value Assigned by the Servicer or Fannie Mae.”
Freddie Mac requires that all servicers dedicate a toll-free number that is published to borrowers/sellers for the purpose of escalation.
For non-GSE traditional short sales, FHA Pre-Foreclosure Sales (PFSs), VA Compromise Sales, there are unofficial processes in place for escalation of the file to someone who can attempt to resolve the stalemate.
- Do not escalate the file prematurely. Work with the negotiator until there is obviously no way to resolve the issue.
- If the escalation is due to pricing, have your comparables, repair estimates, and justification for an increase in price ready prior to escalation.
Escalation can slow down the process. Be sure there are no other alternatives and that your borrower/seller has the time to work through the escalation process.
When servicers approve a short sale, they will notify the borrower/seller in writing. The borrower/seller and his or her finance, tax, and legal professionals should review the approval letter closely both for the terms disclosed and for items not mentioned. The approval letter should also be reviewed for any items requiring clarification.
Sample Servicer Approval Letter #1
This letter will serve as Bank C’s demand for payment and advises you that Bank C and its investors and/or insurers have agreed to accept a short payoff involving the above-referenced property (the Short Sale transaction). This demand should be used by the closing agent as our formal demand statement. No additional statement will be issued. This approval is exclusive to the offer by the buyer referenced in this letter. The conditions of the approval are as follows:
- Closing must take place no later than February 5, 2017 or this approval is VOID.
- The approved buyers are Bob and Carol Smith and the sales price for the property is $260,000.
- Another buyer cannot be substituted without Bank C’s prior written approval.
- Proceeds to Bank C to be no less than $230,733.51.
- Total closing costs, including real estate commission, not to exceed $29,266.49. This figure includes $1,000 for second lien and $3,000 for third lien.
- Termite reports and repairs not to exceed $0.00.
- Real estate commission not to exceed $13,000.00.
- This property is being sold in “AS IS” condition. No repairs will be paid for out of the proceeds unless specifically stated otherwise.
- The sellers will not receive any proceeds from this short sale transaction. If there are any remaining escrow funds or refunds they will not be returned to the seller, they will be sent to Bank C to offset the loss.
- Bank C or its investors will not pursue a deficiency judgment if the short sale closes on the referenced loan. If the short sale does not
In approval letter #2, note:
- The bank is forgiving the deficiency on this.
- The approval date and closing date.
- Termite issue.
|Date: July 1, 2017|
|Servicer A agrees to release its security interests in the above collateral upon receipt of $1,000 in certified funds. This amount is for the release of investor A’s security interest only. Please contact your tax advisor regarding any tax ramifications from this transaction.|
|Servicer A requires that we approve a final settlement statement prior to closing that shows a balance to be paid to Servicer A of no less than $473,285, which will show a real estate commission of no more than $28,397 which is to be included in closing costs not to exceed $52,412.75. Closing shall take place no later than July 10, 2017.|
|In approval letter #1, note:|
|• The servicer is releasing security interest only (mortgage).|
|• There is no mention of releasing the promissory note.|
|• Clarification is needed to determine if the seller has to pay the deficiency.|
|• The date of the approval and date of closing.|
It is important that the borrower/seller take responsibility to be certain there is a written waiver of deficiency from the servicer when closing on the short-sale transaction. Although a borrower/seller may be bringing funds to closing to contribute to the investor’s bottom line, there still remains a deficiency, and to protect the borrower/seller from receiving a judgment of that deficiency, a written waiver may need to be in place. All of this depends on the recourse debt laws of the state in which the property is located. Here is a sample deficiency waiver from Fannie Mae.
Why Short Sales Fail
Historically, short sales were failing primarily because the servicers were not prepared to deal with them. They took too long to respond and did not have enough manpower to process these transactions, nor did they have a desire to do so. Although there is no guarantee that the servicer will approve the short sale, listing agents have a responsibility to create a contract that has a reasonable chance of closing and to monitor the transaction throughout the approval process. In today’s market, short sales are failing because agents are not aware of the process and forms needed, and because buyers and sellers lack qualification and do not understand the negotiation considerations. It is imperative that agents take responsibility for the success or failure of short sales to the extent that we have control.
- The borrower/seller did not have valid financial hardship.
- The buyer didn’t do his or her due diligence.
- The buyer wasn’t qualified.
- The contract did not have a reasonable chance of closing. Did the buyer:
- Offer fair price?
- Tender earnest money?
- Complete inspections?
- Make mortgage application?
- Improper document submission (Equator)
- The BPO came in high and the servicer thinks the offer is too low.
- The servicer took too much time and the buyer walked.
- Junior lien holders or PMI refused.
Problem: Junior Lien Holder Says “No”
The listing agent needs to assess the plan for repayment of debt to the junior lien holders prior to acceptance of an offer. This area of negotiations is a major battlefield. If you know the holder of the junior lien and you can ascertain what they are willing to accept to release their lien, then resolving this prior to seller acceptance of the contract is best.
The payment of what the junior lien holder wants to release the lien does not always have to come from the primary lien holder. Once it is determined how much the lien holder wants, the payment can be made by the seller (if funds are available) or the buyer, or both.
Problem: Short-Sale Package Not Submitted Properly
This is one of the most common reasons why short sales fail. If the package is not complete, servicers typically will not call immediately and tell you what is missing. They will simply set the package aside until they have the time to start making such calls. Other servicers may attempt to communicate with you on the missing pieces, but that alone slows down the process. And still others will terminate the file without informing you.
Submit a complete short-sale package as required by the servicer.
Problem: Offer Too Low
Each servicer has its own formula for what price it will accept on a short sale. There are no hard-and-fast guidelines on what the servicer will approve. This is why the buyer’s representative should have done a thorough CMA for the buyer prior to writing the offer and why the listing agent should have counseled the sellers to counter any offers to establish the best price and terms possible prior to accepting it.
Solution for buyer’s representatives:
Do an accurate CMA and counsel your buyer on making an acceptable offer.
Solution for listing agents:
Have sellers negotiate the best contract they can prior to acceptance and submission to the lender.
Problem: Buyer Not Strong Enough
A pre-approved buyer has a much better chance of getting their contract approved by the lender than one who is only pre-qualified. A cash buyer will need to submit proof of funds. The servicer wants to see a contract that has a strong chance of closing.
Submit thorough buyer qualification information and a strong contract with as few contingencies as possible. From the servicers’ point of view, a contract that stipulates that the buyer will be doing his mortgage application, home inspection, etc., after servicer approval has less of a chance of closing than one where the buyer has already taken the appropriate steps.
Problem: Inaccurate BPOs
As discussed previously, if the BPOs and/or appraisal of the property was inaccurate and the lender has a distorted picture of the fair market value of the property, this could influence the servicer’s approval.
If the contract is not approved, ask the negotiator how the BPOs compared to your CMA and see if there is a problem that can be resolved. Be certain to have interior photos that further support the buyer’s contract terms.
Although length of lender approval is not tracked for all mortgage servicers in the United States, anecdotal feedback from real estate practitioners is that many short sales fail because the buyer simply got tired of waiting.
Solution for buyer’s representatives:
Counsel the buyer on the frustration of time delays.
Solutions for listing agents:
- Recommend the seller negotiate sufficient earnest money to keep the buyer from backing out as well as negotiate a realistic time frame for the buyer to wait for lender approval in the contract.
- Keep the lines of communication open between the listing agent and buyer’s representative. This, in turn, keeps the buyer in the loop of communication.
- Know the process and escalate it when appropriate.
Problem: Doesn’t Meet Servicer or Investor Criteria
Many of the loans we are attempting to do a short sale on have been securitized and sold to investors. The securitization agreement the servicer has with the investor often gives specific parameters of how much the investor can discount the loan in a short-sale situation.9
Submitting a thorough CMA can show the value of the property, but this is where logic sometimes fails and it becomes a “because they said so” situation. You might ask the negotiator how the BPOs compared to your CMA and see if there is a problem that can be resolved.
Many of the loans we are attempting to do a short sale on have been securitized and sold to investors. The securitization agreement the servicer has with the investor often gives specific parameters of how much the investor can discount the loan in a short-sale situation.