Changes in Short Sale Rules by Laurie Moore-Moore

Forget What You Know about Short Sales – The Rules Just Changed
Published on Monday, September 14, 2009, 8:23 PM Last Update: 15 hour(s) ago by Laurie Moore-Moore
Category: All Articles » REO’s and Foreclosures
There’s an old saying, “It’s not always what you don’t know that hurts you, it’s what you know for sure that isn’t so.”

Agents currently working the short sale market may soon find themselves in this situation. What we’ve been taught about how to do successful short sales will soon work against us and our sellers, because the government just changed all the rules with the new Making Home Affordable (MHA) program. We must do things differently. Very differently,

The Making Home Affordable program is being managed by Treasury and Fannie Mae. It covers more than 85% of mortgage loans, including loans owned or guaranteed by Fannie Mae or Freddie Mac, FHA loans, and loans managed by about 50 of the major servicers. For these loans, the new MHA policies and processes are mandatory.

Good news and bad news
There’s good news and there’s bad news associated with the MHA changes. The good news is that it is actually an attempt to simplify and standardize the short sale process, rules and paperwork. The bad news is that there are tens of thousands of loss mitigators out there who have to be trained before the new program will be implemented in a consistent way. So right now, implementation is patchy at best.

Making sure it is implemented
To speed up the implementation, Freddie Mac has been tapped to audit servicers’ files and fine servicers who aren’t using the new MHA process. With this “big stick” and some financial incentives, the program should pick up speed.

It’s mandatory
Realtors who want to close short sales will need to learn the new MHA rules, guidelines and use the new standard forms. And, yikes! Things are really different under Making Home Affordable. There are some small differences based on whose loan it is, but in general, here are just three key changes:

Some of the changes in how you’ll do business
Change #1: There are clearly defined steps which the servicer’s loss mitigator must follow in sequence when a loan is in default (or imminent default ). If attempted refinancing or a loan modification do not work — then and only then — will a loss mitigator consider the possibility of a short sale. This is the only time during the loss mitigation process when a short sale will be a possibility. The loss mitigator will use a specific net present value formula to determine if the lender/investor will net more from a short sale than from a foreclosure. The decision is strictly a financial one. This means the short sale attempt will be approved in advance if it is financially to the lender’s advantage.

Change #2: You will continue to list with the seller, but the loss mitigator sets the price and the listing term. The listing term can range from as few as 90 days to as long as 365 days. The servicer/lender still must accept the contract which your seller has approved.

Change #3: Good news! Fannie Mae’s Servicing Guide Announcement #09-03 clearly says there is to be no negotiation of short sale commissions. “..closing of pre-foreclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to the level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6% of the sales price of the property in aggregate.” In other words, if you’ve negotiated a listing fee with the seller, the servicer/lender may not ask you to reduce that fee.

Important work — helping homeowners in distress
This should give you a quick idea of how significant the changes are for the short sale process. In short sales there is a lot more to know, so if you are helping homeowners in financial distress avoid foreclosure, you’ll want to learn all you can about the Making Home Affordable program. This is important work and I’d encourage you to — Get Involved. Get Trained. Get to Work. America’s homeowners need you.

Editor’s Note: Get up to speed on the new short sale process, better assist your clients in financial distress, and position yourself for more success through this new online course with Laurie Moore-Moore. Endorsed by Broker Agent.

Laurie Moore-Moore is CEO of The Institute for Luxury Home Marketing and co-founder of its new division, The Center for Asset Preservation. For information on the industry’s first and only comprehensive training (live and online) on Short Sales under the new Making Home Affordable program, click here.

Upcoming Changes in the Residential Real Estate Market 10/12/2009

The Federal Tax credit for first time home buyers will expire on December 1, 2009. That means that unless the sale is completed prior to that date there is no tax credit available. Since many closings are taking more than 30 days new homebuyers wanting to receive the tax credit should open escrow no later than October 15th to have high probability of closing before the December 1st deadline.
Temporary High Loan Limit for conforming loans through Fannie Mae will expire at the end of this year. That means loans originated after 2009 will be governed by the permanent high loan limit which in Orange County is $625,000. So currently a 20% down payment loan could be on a property up to $910,000. When the High Loan Limit resets to the permanent level next year the most a 20% down payment loan would work for is $780,000. This may have the effect of pushing home prices in the $800,000 to $900,000 down a little.
The FHA has experienced significant drains on its cash resources and in order to slow the depletion is tightening credit criteria and trying numerous ways to increase the quality and decrease the number of loans it is guaranteeing. Among the changes are the way Homeowners Associations are evaluated for inclusion on the approved list, changing the appraisal procedures, and increasing the restrictions on FHA lenders and brokers.
Next March the number of loans through Fannie Mae, Freddie Mac and the FHA will drop significantly due to lack of capital for those programs. This will create an opportunity for private lenders to reenter the secondary loan market after years of being unable to compete with the government programs because of the low cost of funds the government programs enjoyed. This opportunity for the private investors to participate will be marked by a significant increase in rates because the private investors are not subsidized by the taxpayers.
I expect that we will see continued and accelerating inflation of the next few years. This inflationary pressure will cause interest rates and possibly property values to rise. The improvement in the economy will also contribute to the increase in home prices and home mortgage rates.

Inflation 11/15/2007

It is my belief that there is a significant potential for the current trend of the dollar losing value to continue and accelerate.  The dollar is now, for the first time, lower in value than the Canadian Dollar and has lost 60% of its value when compared to the Euro.  We are in the early stages of a run against the dollar by foreign investors.  Solid commodities have increased in value as measured by the dollar value significantly over the last few years and continue at an accelerating pace.  

 It is not an opinion that the US dollar is losing value against gold or other solid liquid commodities it is a fact.  It is not an opinion that the US dollar will drop further in value as measured against other currencies and solid commodities if a sell off of the dollar continues and accelerates as it most likely will. 

The only way the US dollar could stabilize and regain value would be if the US government were to keep taxation at the current level or lower it further and then cut the budget to the point where the expenses of government were at least 10% less than actual prior year revenue and keep the budget at 90% of actual prior year revenue for at least 10 years.  That time period may be enough to significantly reduce the national debt with a strong growing economy that would result in investor and consumer confidence, lower interest costs on the debt, greater tax revenues, and a lagging growth in government spending.  Sounds great, won’t happen. 

 It is my opinion that we are in a recession and will go into a depression within the next 24-36 months.  We have a government that is increasingly socialistic.  There has been an organized program to create a mindset in the US citizens to be tolerant and supportive of socialistic concepts and governing methods for over 80 years.  In the 1930’s Roosevelt instituted a number of very socialistic programs to try and get the country out of the depression.  The socialists have praised those programs and claimed success when in fact just the opposite was true those programs lengthened and deepened the depression.  What got us out of the depression was the reduction to near elimination of all the socialist programs and the result oriented can do attitude that arose during WWII.  Socialism cannot function where there is accountability and a clear focus on a stated result.  The first solutions to be tried in the next depression will be more extreme versions of the programs instituted during the Roosevelt administration and then either an external war or an internal war will occur.  An external war could result as enemies decide that we are weak and ready for the taking, our government decides that they need a war to send potential internal anti-socialist enemies off to defend our nation and to take the focus of the people off of the problems in government.  An internal war could possibly occur if the anti-socialists coalesce and act before an external war is declared.  It would be a war because the socialist will control or have neutralized most if not all of the weapons and military forces that might oppose them.     

 Putting aside all the political issues, one question looms large.   How does a normal family survive the economic turmoil ahead? 

 In an inflationary period money rapidly loses value against the goods and services a consumer needs.  Today a loaf of bread is $3 next week it is $4.  Wage and salary income do not increase as quickly as the cost of goods and services.  Short sale cycle commission incomes may keep pace with inflation depending on the goods or services but existing tax rate levels will cut into the rising income levels of commission workers negating some of the increased income. Year end bonuses will have little or no value.  Based on this premise the ordinary family must move its income earning methods away from or augment the stable income sources that have been relied on in the past.  Pure wage and salary earners both in the private and public sectors will be hurt the worst.  Military personnel or others who receive food and housing as part of their income will be somewhat sheltered.   Direct selling producers of food commodities (small farmers) will be sheltered.  Indirect sellers of food and other necessary commodities will be sheltered to a lesser extent. 

 Stocks and bonds for the most part will have little or no value as income producers during an inflationary depression. 

 In all this doom and gloom there is an incredible opportunity.  Families that are willing to work hard can choose a path that may ensure long-lasting financial success.  There are commodities that keep pace with or even outpace inflation and hyper-inflation.  In inflationary periods existing debts are paid with dollars of lesser value.  If those dollars were earned prior to the inflation there is no gain, if the dollars are earned just prior to making the payments there is no gain.  If you borrowed the money at a fixed rate to make the payments at a rate that is less than the rate of inflation you would probably have a gain.  If you bought gold or another solid liquid commodity and sold it as needed or even better borrowed against it at a rate that is lower than the combination of the inflation rate and the debt rate, you would have a gain and an asset that increases at an equal or greater rate than that of inflation.

 Steps to protect your financial position:

 1.      Adjust your income so that it is tied to the absolute value of what you produce

              a.      Take commission position or renegotiate your method of compensation

2.     Sell volatile investments (stocks, bonds, to a lesser extent residential & commercial real estate)

3.     Buy absolute value commodities (gold, silver, agricultural real estate, businesses providing absolute value goods and services)

4.     Eliminate the need for a cash position by setting up line of credit secured by gold or other absolute commodity

            a.     This will reduce the value lost to inflation while providing availability of cash when needed

5.    To be very safe keep total personal debt ceiling at 80% of absolute value commodities and make sure that your debt service does not exceed 25% of your absolute income.

6.     Move debt away from you by forming corporations and trusts

               a.     These can be more safely leveraged at a higher rate

7.      Move non-cash liquid assets closer to you

8.     Live in or have second home in non-metropolitan area, preferably warmer agricultural area.

9.     Develop trusted  reliable sources for food, water, health care, fuel and other essential goods and services