Ever since FHFA announced that it had directed Fannie Mae and Freddie Mac to issue new, "clear" guidelines for short sales to their mortgage servicers, there have been numerous blog posts and news articles highlighting the guidelines. If you've missed them, don't worry. They are all a reiteration of FHFA's News Release and Fact Sheet and, therefore, have the same information, which I will repeat here before going into a little more detail.
The Bullet Points
The New Guidelines Will:
- Align and consolidate existing short sale programs into one standard program that will enable lenders to quickly and easily qualify eligible borrowers for a short sale.
- Offer special treatment for military personnel with Permanent Change of Station (PCS) orders.
- Provide servicers and borrowers clarity on processing a short sale when a foreclosure sale is pending.
- Limit subordinate lien payments to $6000.00.
- Permit a homeowner to obtain approval for a short sale even if they are current on their mortgage if they have an eligible hardship (death of a borrower or co-borrower, divorce or legal separation, illness or disability, distant employment transfer including a Permanent Change of Station (PCS) Order greater than 50 miles one way from the borrower's current residence.
- Significantly reduce the documentation required to complete a short sale for borrowers "most in need".
- Waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make such contribution either in the form of cash to closing or the signing of a promissory note.
(The Devil Is Always In The Details)
Let's start with borrower eligibility...and this is a big one folks...the criteria for short sale eligibility, required borrower documentation, and borrower contributions are affected by the degree of delinquency. For instance, Fannie Mae indicates the following: for mortgages that are less than 31 days delinquent (but considered in danger of imminent default) the property must be the primary residence of at least one of the borrowers. However, for loans that are more than 30 days delinquent, the property may be a principal residence, a second home or an investment property. In addition it may be vacant but must not be considered condemned.
Let's move on to Borrower documentation. In order to consider a short sale both Fannie and Freddie require a complete Borrower Response package which includes a complete UBAF (Financial Statement), tax returns, bank statements, pay stubs, a 4506T, etc. UNLESS the borrower is more than 90 days delinquent and their credit score is below 620 in which case the servicer can approve a short sale without verifying hardship or obtaining a complete package.
Finally, moving on to the piece that may have your heart palpitating if you find yourself in a position where you must consider a short sale...Waiving The Deficiency in Exchange For A Financial Contribution. Let me start by saying that I have not handled a single short sale where the deficiency was not waived and, in most instances, my clients were not required to make a contribution. I suspect that not much has changed here except that the GSEs are now flat out saying if you have excess reserves or surplus income we are going to require you to participate in the loss.
So what qualifies as cash reserves/assets: cash, savings accounts, money market funds, marketable stocks or bonds.
What does not qualify: retirement accounts.
What's the benchmark? Reserves in excess of $10,000 or six times the borrower's mortgage payment (including taxes and insurance whether or not they are included in the payment to the lender).
What's the test for a Promissory Note? The servicer must determine whether the borrower's FUTURE debt to income ratio will be less than 55%. In order to calculate that they must take into account the borrower's future housing payment (if no actual figures are available they must use 75% of the current mortgage payment (including taxes, insurance and HOA/Condo fees), monthly payments on all installment debts with more than 10 months remaining, payments on all revolving or open-end accounts, alimony, child support and/or separate maintenance payments with more than 10 months remaining, car lease payments, aggregate negative net rental income (other than subject property), payments on mortgages and/or HELOCs for a second home.
Bear in mind the servicer is going to use your credit report(s) to determine these figures and if they see new lines of credit or liens have been obtained during the term of your hardship, it's going to raise a big red flag.
If it is determined that your future debt to income ratio will be less than 55%, a request will be made for a promissory note contribution. The monthly payment can be no more than one-half of the difference between your future debt to income ratio and 55%. The promissory note will always have an interest rate of 0%.
Guidelines state that borrowers being evaluated under the streamline program (i.e., borrowers more than 90 days behind with a credit score of less than 620) will not be asked to contribute. Also bear in mind that the GSEs require that the servicer seek to arrive at a mutually agreeable contribution amount in order to facilitate the short sale in the event that the borrower is more than 30 days delinquent.
Stay tuned for more information on these guidelines and, if you'd like a private consultation, please don't hesitate to contact me at 603-490-5344.