How will the Foreclosure Misconduct Settlement affect Short Sale’s?

Now that the settlement with the big banks has been reached, the United States Attorneys General is now imposing some new short sale guidelines on these servicers in an effort to move the short sale process forward in a quicker and more streamlined fashion.

In March, the United States Attorneys General and the Department of Justice filed the foreclosure misconduct settlement with the five major mortgage servicers – Bank of America, GMAC, Citi, JPMorgan Chase and Wells Fargo.  The servicers will be required to pay out $20 billion to help homeowners avoid foreclosure and $7 billion of this money is to bring relief to distressed homeowners in the form of short sales and transitional assistance.  Therefore, to coincide with the monetary settlement, new servicing guidelines and timelines have been imposed and the servicers will be required to adhere to them or face penalties.

This is great news for everyone involved in short sale transactions.  If you are an agent, you will see your commissions sooner.  If you are an investor, you will see profits turn quicker whether you are buying a short sale property as a rental or you plan to rehab and resell.  If you are a seller who wants to get through the hardship and move on with your life, you will see the light at the end of the tunnel.  If you are a buyer, the anticipation of moving into your new home will be exciting instead of frustrating.

These top servicing giants are going to be required to expedite the short sale process and a few of them have already started putting the plans and processes in motion.  Lenders are not going to be allowed to sit on homeowner’s requests for short sales any longer.  They will have to acknowledge and confirm a borrower’s request within ten business days of receiving it.  They will also be required to review the file in a timely manner and notify the borrower within 30 days of receiving a short sale request package if any documents are missing or if any additional documents are required.  Servicers will also have to provide borrowers with a short sale decision within 30 days after receiving a complete short sale package request.  The servicers must inform borrowers if deficiency payments are required and provide an estimate of any deficiency amount.  Lastly, servicers will be tasked with evaluating all options for a distressed homeowner and view foreclosure as the very last resort.

There are even guidelines imposed to bring more protection to our Military personnel.  Mortgage servicers can no longer require military service members are delinquent on their mortgage to qualify for a short sale.  Additionally, when determining their financial hardship, they must take into consideration a service member’s relocation orders whether there is a decrease in income or not.

Further protection for Military personnel include insuring the mortgage servicer does not inaccurately submit reports to the credit reporting agencies when a service member obtains a short sale or loan modification and was current on their mortgage before military orders forced their relocation.

If the servicers do not comply with the guidelines, they could face penalties.  If more than 10% of their short sales exceed the new timelines, they will be in violation of the settlement agreement and could be fined up to $1 million.  For repeat offenders, the fines can go up as high as $5 million.

Now keep in mind, it is only these five top servicers who are required to abide by the new guidelines.  It will be interesting to see if large chunks of their delinquent loan portfolios are sold off to other servicers.

In the past, the lengthy short sale process caused many real estate agents to avoid listing short sale properties.  The amount of work involved and the long tedious process was not worth it.  Buyer’s agents are hesitant to steer buyers toward short sale listings because the buyer’s get frustrated and impatient and oftentimes walk away from the transaction mid-stream through the process.  Should the new guidelines be adhered to most of the aggravation and frustration will be alleviated.

If you are involved in short sales on a regular basis, there are some things to watch for going forward.  Bank of America and GMAC have already issued new standardized forms that must be used.  The generic forms will no longer be accepted.  When the servicer alerts the seller or short sale facilitator that documents are needed, there will be tight deadlines to get them submitted.  If not submitted within the servicer’s time frame, the short sale could be cancelled.  This means that if you are going to take on a short sale listing, cooperation will be required from your sellers.  Sellers will not be able to wait two or three weeks to send in updated financials or missing documents.  Chances are they will be given 24 – 48 hours to get the documents turned in.  Therefore, while the guidelines may offer a sigh of relief, as a short sale professional, you too will have to stay on top of the process and your seller to get it done.  While it may require a bit more work in the scheme of things, you will see your commissions come in faster as the properties turn much more quickly.