FHFA’s Short Sale Guidelines to Stem Foreclosure

In a move to enable homeowners to sell their homes for less than the balance mortgage, the Federal Housing Finance Agency (FHFA) in association with Fannie Mae and Freddie Mac has framed new guidelines that will streamline the short sale process.

Under the new guidelines, which will come into effect from Nov. 1, a homeowner with a Fannie Mae or Freddie Mac mortgage can to sell their home in a short sale even if they are current on their mortgage if they have an eligible hardship.

“These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” FHFA Acting Director Edward J. DeMarco said in a statement. “The new standard short sale program will also provide relief to those underwater borrowers who need to relocate more than 50 miles for a job.”

Applauding the move, the National Association of Realtors (NAR), said that these new guidelines would prevent losses for all the parties involved.

“As the leading advocate for homeownership, Realtors know that when a family is absolutely unable to keep their home, a short sale is often the best option for homeowners hoping to avoid foreclosure,” said NAR President Moe Veissi in a statement. “Realtors appreciate FHFA’s efforts to increase the number of short sale approvals, which limit the losses incurred by homeowners, lenders, the federal government and taxpayers.”

The NAR said improving short sale eligibility would allow more families to avoid foreclosure and reduce the negative impact foreclosures have on families and communities. Short sales help stabilize home values and neighborhoods by keeping homes occupied, the association said in a statement.

“We hope these new guidelines will allow many more hardworking American homeowners that would have previously been denied a short sale to now be approved and avoid defaulting on their mortgage loan,” Veissi said.

The new guidelines will offer a streamlined short sale approach for borrowers most in need; enable servicers to quickly and easily qualify certain borrowers who are current on their mortgages for short sales; consolidate existing short sales programs into a single uniform program; and provide servicers and borrowers clarity on processing a short sale when a foreclosure sale is pending.

Fannie Mae and Freddie Mac will also offer up to $6,000 to second lien holders to expedite a short sale. Meanwhile, global ratings agency Fitch said that in the short term, the new guidelines could increase losses on some existing bank home equity or second lien portfolios.

“For lenders, short sales generally provide a more efficient and cheaper alternative to the increasingly lengthy and costly foreclosure process. For example, short sales on non-agency residential mortgage-back security are currently finishing 20 months after the last payment made on the loan. That is approximately 10 months shorter than the average time to foreclose. Similarly, the loss severity on prime non-agency mortgages is 14 percent lower on short sales than real estate owned sales,” the company said in a statement.

However, the rating agency believes that the impact on lenders will be positive in the long run.