For home sellers, buyers and real estate brokers hoping for breakthroughs on simplifying short-sale transaction and timelines, this may not be the proverbial silver bullet, but it’s definitely positive news: The agency that controls Fannie Mae and Freddie Mac has a serious effort under way to remove or minimize some of the major hurdles and to put those changes in the field as soon as this fall.
Officials at the Federal Housing Finance Agency — the folks who now make the rules governing millions of mortgage transactions at both companies — told me last week that they are actively seeking input from lenders, servicers, Realtors, investors and housing counselors about how to speed up short sales on loans connected with Fannie and Freddie.
National Association of Realtors officials, who have already met with the agency’s special short-sale task force, confirm that the effort is for real and promise potentially significant reforms. FHFA officials say their deadline to wrap up their review of short-sale obstacles is June 30, and they plan to announce detailed improvements to the process no later than Sept. 30.
Given the sheer size of the companies’ portfolios — plus the estimated 1.7 million additional loans expected on the foreclosure conveyor belt at Fannie and Freddie in the coming several years — any substantive improvements could have wide-ranging benefits for everybody involved.
What’s the agency looking at?
High on the list:
1. Second liens. Banks that hold second mortgages and equity credit lines on underwater houses often drag out the short-sale process by refusing to recognize hard economic realities: The collateral that once secured their loan no longer exists.
They stand to be zeroed out in the event of either a foreclosure or short sale, and they will have to report that loss to auditors, investors and regulators. As a result, they dither and delay deals by demanding too much for their consent to sale terms, or they simply hold out until buyers give up and the transaction collapses.
FHFA officials leading the short-sale reform effort believe that Fannie and Freddie have sufficient pressure points on banks that they can bring to bear — mainly related to servicing rules and penalties — but they decline to discuss what they might entail. For their part, servicing experts in the private sector say better standardized rules between the two companies on second liens in short sales, plus fixed ceilings on what banks can expect out of transactions in advance, could reduce much of the current friction.
Travis Hamel Olsen, chief operating officer of Loan Resolution Corp., a Scottsdale, Ariz.-based firm that assists major lenders in troubled mortgage workouts, says FHFA should enforce a non-negotiable 10 percent ceiling on what second lien holders can obtain from short sales.
That is higher than the 6 percent or $6,000 ceiling allowable under the federal government’s HAFA (Home Affordable Foreclosure Alternatives) ceiling, but attractive enough to bring most major banks who deal with Fannie and Freddie to the table faster.
2. Mortgage insurers. The FHFA task force expects to come up with rules that eliminate or reduce mortgage insurance companies’ current ability to prolong negotiations indefinitely over claims in short sales, and thus contribute to the breakdown of transactions.
3. Mandatory timelines. Though FHFA is nowhere close to deciding on hard and fast timelines for participants to meet in short sales involving Fannie and Freddie, they are a top priority in the current effort. Six months from start to finish "is way too long," said one official, who declined to suggest what would be a more acceptable limit.
Legislation pending in Congress and supported by NAR (House bill H.R. 1498) would nail down one key time segment — it would require servicers to respond within 45 days to any fully executed short-sale offer.
4. Valuation issues. FHFA expects to produce better guidance on the steps servicers and other participants in short sales should follow to arrive at acceptable property valuations. That, in turn, should help limit negotiations over what lenders and buyers expect from transactions and the methodologies used to get to the final numbers.
In its recent meeting with FHFA officials, NAR pushed hard for Fannie and Freddie to tell brokers and other interested parties early in the process what minimum price they will accept in any given short sale.
5. Staffing. Though the biggest banks and servicers have muscled up their loss-modification and foreclosure alternatives staffing since the start of the mortgage bust, FHFA believes that greater responsiveness to short-sale participants — sellers, buyers, realty agents — is needed. Since both Fannie and Freddie have "servicer performance evaluation" standards, FHFA has a variety of administrative carrots and sticks available to prod lenders and servicers to push through short sales faster.
So what does this all add up to? Just another bureaucratic exercise? Or could FHFA’s new push for short-sale efficiency really mean something on the front lines? My guess is that it just might. FHFA, which is tasked to "conserve" Fannie’s and Freddie’s assets and achieve the best possible financial resolutions of their troubled loan portfolios in the taxpayers’ interest, appears to be genuinely seeking to cut timelines and red tape in short sales. They also know the hard facts: Short sales yield Fannie, Freddie and investors much more at the bottom line — they cost taxpayers a lot less on average — than foreclosures.
Remember these deadline dates — June 30 and Sept. 30. We’ll check back and see how much actual streamlining comes out of the FHFA’s latest high-priority project.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.
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