Homeowners of underwater properties have a reason to rejoice thanks to the introduction of new guidelines from the two government-sponsored enterprises (GSEs) - Fannie Mae (FNMA) and Freddie Mac (FMCC). On Tuesday, the Federal Housing Finance Agency (FHFA) - the regulator for these two GSEs - announced a number of guidelines that are expected to make short sale simpler and easier. With the implementation of the guidelines effective November 1, short sale of properties would speed up.
The new measures announced by FHFA will have to be followed by mortgage servicers. These will consolidate the current short sale programs into one streamlined program and enable lenders and servicers to promptly and easily get eligible borrowers for short sale.
As part of the new set of rules, property owners with mortgages from either of these two GSEs will be able to short sale their homes despite making timely payments of interest and principal if they have an eligible hardship (death of a borrower or co-borrower, divorce, disability or relocation for a job). The servicers will be able to allow short sales without any additional permission from these GSEs.
Moreover, both GSEs will be lowering the number of documents required to complete a short sale, thereby aiding those homeowners who are in danger of foreclosure. Further, it would also improve the efficiency of the servicers in completing a short sale.
In addition, the servicers will make guidelines clearer and more uniform, leading to faster processing and execution of short sales. Further, the GSEs will offer a maximum of $6,000 to the holders of the second liens (once the short sale is complete), so that mortgage holders do not haggle over the proceeds of the sale.
Moreover, while approving the short sale of property, servicers would evaluate the ability of the homeowner to pay the difference between the balance loan amount and the current sale price of the home. In cases where the property owner has the ability to pay the differential amount, the GSEs will waive off the right to follow deficiency judgment.
Though the FHFA did not provide any projections related to the number of homeowners eligible for the new short sale initiative, there are about 4.6 million borrowers with mortgages backed by GSEs. Out of these, approximately 80% have not missed any loan payments.
The new short sale guidelines are a part of the FHFA's Servicing Alignment Initiative that is expected to simplify the GSEs plan for short sales and other modes to prevent foreclosures. In framing the new streamlined short sale process, the FHFA and the GSEs worked in collaboration with the National Association of Realtors (NAR). The NAR believes that improving the short sale procedure would help homeowners avert foreclosures and also stabilize the value of residential property going forward.
However, one of the biggest fall-outs of the additional short sales is expected to be for those banks that have provided second mortgages to the borrowers. They will have to record losses on home-equity loans. Some of the major providers of second liens include Wall Street biggies - JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), Citigroup Inc. C) and Wells Fargo & Company (WFC).
Nevertheless, the new short sale process is also expected to be in the larger interest of the overall housing sector and economy. In addition, the real estate agents and home owners planning to sell their property would also benefit from this simplified process.