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Shorts sales streamlined to head off 'underwater' mortgage foreclosures

(4/20/2012) Erate Exclusive - The Federal Housing Finance Agency (FHFA), this week, directed Fannie Mae and Freddie Mac to pump up their short sales efforts with enhanced short sale, deeds-in-lieu and deeds-for-lease programs to help more homeowners avoid foreclosure.

Beginning in June, new timelines will require Fannie and Freddie mortgage servicers to review and respond to requests for short sales within 30 days after a homeowner's short sale offer.

"FHFA and the Enterprises (Fannie and Freddie) are committed to enhancing the short sales and deeds-in-lieu process as additional tools to prevent foreclosure, keep homes occupied and help maintain stable communities," said FHFA Acting Director Edward J. DeMarco.

"These timeline and borrower communication announcements set minimum standards and provide clear expectations regarding these important foreclosure alternatives," DeMarco added.

In a short sale, the lender forgives a portion of the debt, provided a qualified buyer is ready to purchase the property. In a deed-in-lieu, the bank buys the property. In a deed-for-lease, the bank buys the property and rents it back to the former owner.

Of the three, lenders would prefer to unload properties and be rid of carrying costs and right now is a good time to capitalize on a hot short sale market.

A growing number of homeowners are "underwater" on their mortgage, owing more than their home is worth. Because they've lost hope they'll ever recover enough equity to make homeownership pay off, some opt for a short sale, but if they can't make the deal pencil, a growing number are opting for a "strategic default."

In a strategic default, even homeowners who can afford the monthly payment walk away from their mortgage because of lost equity, short sales have been too complex (and can drag on for months, up to a year or more), or to get the lender's attention for some other workout.

A streamlined short sale could change their minds and have less of an impact on their credit standing.

Streamlined short sales overdue

Also, right now, cash-rich investors with a growing penchant for short sales are energizing housing market sales.

The National Association of Realtors (NAR) says distressed homes — foreclosures and short sales sold at deep discounts — accounted for 34 percent of February sales (20 percent were foreclosures and 14 percent were short sales), down from 35 percent in January and 39 percent in February 2011.

John Campbell's Inside Mortgage Finance HousingPulse survey says distressed properties account for nearly 49 percent of homes on the market for sale.

That was the second highest level ever recorded by HousingPulse and the 25th month in a row that the Campbell's Depressed Property Index (DPI) has been above 40 percent.

The report says all of the growth in the distressed property share of the housing market over the past six months has been driven by an increase in short sales, up from 17 percent to nearly 20 percent during the period.

Campbell says the investor share of short sale buys also grew from nearly 26 percent to almost 31 percent during the period.

Under FHFA orders, addition to the 30-day limit on responding to short sale requests, mortgage servicers must:

• Provide weekly status updates to the borrower if the short sale offer is still under review after 30 calendar days.

• Make and communicate final decisions to the borrower within 60 calendar days of receipt of the offer and complete borrower response package.

FHFA says later this year, Fannie Mae and Freddie Mac will announce additional streamlining enhancements addressing borrower eligibility and evaluation, documentation simplification, property valuation, fraud mitigation, payments to subordinate lien holders, and mortgage insurance.

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