On Sept. 16, 2010, a new bill requiring lenders to respond to short-sale offers within 45 days was introduced into the House of Representatives. While this bill has widespread bipartisan support, is there a chance it will make the short-sale market more difficult than ever?
On Sept. 17, U.S. Reps. Robert Andrews (D-N.J.) and Tom Rooney (R-Fla.) introduced a bill, H.R. 6133, "Prompt Decision for Qualification of Short Sale Act of 2010." On the surface, this bill seems to provide the long-sought relief consumers and real estate professionals have been seeking.
However, if a mortgagor (the borrower) submits a request to his mortgage servicer including a fully executed purchase contract, and "the mortgagor does not receive from the servicer, before the expiration of the 45-day period beginning upon receipt by the servicer of such request and information, a written notification of whether such request has been approved, that such request has been approved subject to specified changes, or that additional information is required for such a determination, such request shall be considered to have been approved by the servicer."
In other words, if the lender fails to respond to the short-sale request with the 45-day period, the short sale will be considered "approved."
What’s painfully clear about this bill is that lenders have multiple ways to avoid the 45-day limit. For example, if the seller does not submit the necessary documents including a hardship letter, it would be easy for the lender to say, "Additional information is required for such a determination."
Another way for the lenders to delay the process would be to make changes in what is required for the short sale to be accepted. For example, the lender may want a full-blown loan application with complete documentation from the buyer, even if the buyer is seeking financing from another source.
If passed, this bill will probably provide some much-needed relief to those who have no secondary financing and no private mortgage insurance. Theoretically, if there is only one lender involved, the process should be relatively smooth.
The text of the bill doesn’t address some other important issues. Does this bill apply to all secondary lenders, both institutional and private? Does the automatic approval process at 45 days still apply when there are tax liens or other issues? If so, who would be responsible for paying those? You can have lender approval and still be unable to close.
What can you do to increase the probability that your short-sale transaction will close? Here are some key steps to follow.
1. Know what you’re getting into
Before you list or write an offer on a short-sale property, contact your local title company to get a complete report on the recorded liens on the property. If there is only the existing first loan and perhaps an equity loan from an institutional lender, you have a pretty good chance of closing the transaction.
If there are tax liens, or liens from the homeowners association or other outside entities, this property will be much more difficult to close.
2. Determine if there is PMI (private mortgage insurance)
PMI companies have become a major source of delay in many short-sale transactions. If the owner purchased the property with less than 20 percent down, then there may be PMI on the property. Like any insurance company, PMI companies want to limit their losses and payout.
A common tactic many PMI companies are using today is to demand that owners sign a promissory note where owners agree to pay all or a portion of the shortfall. If the owner refuses and is in default, the PMI company can force the lender to proceed with a foreclosure.
Since the lender may take 12-24 months to complete the foreclosure, the PMI avoids paying the mortgage insurance claim by that amount of time. It’s good business for them and bad for just about everyone else.
3. Check the loan documents
Many adjustable-rate mortgages (ARMs), especially those with teaser rates, have prepayment penalty provisions. Everyone may assume that the amounts owed are only the loan balances, but this may not be the case. Most lenders who have prepayment provisions add them to the amount owed on the short sale.
4. Place pressure on the lender
If your client is facing foreclosure and the lender is stalling on doing a short sale, one option is to contact a consumer attorney from NACA.net. They can do a forensic review of the original loan documents. In many cases, there are errors in those documents that can be used to stop the foreclosure process or at least encourage the lender to be more aggressive about working out a short sale.
Also, it’s almost always more effective if an attorney contacts the lender rather than a consumer or agent.
5. Cross your "t’s" and dot your "i’s"
Before submitting your short-sale offer, make sure that all the documents are in order on your side of the transaction. Have the seller draft a hardship letter, provide complete documentation of their current financial position, a detailed loan application, plus a signed agreement allowing you to speak with the lender on their behalf. On the buyer’s side, it’s best to obtain a preapproval, not just a prequalification.
As part of your package, submit detailed comparable sales information including plenty of pictures, a price-per-square-foot analysis, as well as the amount of inventory on the market in that price range and location. When a lender understands that only 10 percent of the inventory is selling per month and that 90 percent is not selling, they are often more open to accepting your short-sale offer.
Will this new legislation make much difference to the short-sale process? My guess is probably not, but at least it will force lenders to respond more quickly rather than keeping everyone hanging out for months or even years without an answer.