New Treasury Department Guidelines for Short Sale Approvals

The government recently released a new guidance plan to help mortgage companies and lenders speed up the approval process for short sales. The new program applies to all banks that are federally regulated, but not to local or state chartered banks.

The program is called The Home Affordable Foreclosure Alternatives Program, which offers financial incentive to mortgage companies, loan servicers and borrowers to complete a short sale transaction or deed in lieu of foreclosure. 

short sale is when the seller owes more on their mortgage than they can sell the property for in today's market. Therefore in order to sell the home and relieve the seller from any more financial liability to the lender, the lender must approve the sale. Since the seller doesn't profit from the sale or generally have the money to close, the lender pays for the seller's closing costs and any brokerage commissions.
A deed in lieu of foreclosure is when the seller simply signs over the deed to the lender and walks away.
The new guidelines will now make it easier for borrowers who are eligible to apply for a mortgage modification under The Home Affordable Modification Program, but who do not qualify for the mortgage modification or cannot afford to make their modified payment, to sell their home via a short sale or sign a deed in lieu of foreclosure in order to avoid a formal foreclosure proceeding.

Under the new program, mortgage servicers/lenders would receive a $1,000 payment and borrowers would receive a $1,500 payment in relocation expenses. Mortgage servicers/lenders would have 10 days to approve or disapprove a request for short sale. When the transaction closes, they must release the borrower form any debt. In other words, they cannot come after the borrower for a deficiency judgment [not all states allow deficiency judgments].

Problems with Short Sales

The biggest problem with getting short sales approved and closed has been the extremely long time it takes the lender to respond and approve or disapprove the sale. Realtors, buyers and sellers have been frustrated by the process taking anywhere from 3 months to 6 months and some as long as a year. By then, the buyers have walked away because they got tired of waiting and found another opportunity.  The seller and their Real Estate Agent have had to find another buyer and sometimes start the process all over again causing further delays. Eventually, sellers have even lost their homes to foreclosure. Many Real Estate Agents were shying away from even showing short sales to their clients because there was no guarantee of them getting approved and the Real Estate Agents getting paid.  

Under the new program rules, mortgage servicers/lenders are prohibited from reducing real estate brokerage commissions on short sales. These guidelines should help encourage more buyers and their real estate brokers to participate in short sale transactions, as well as encourage sellers to use this method to prevent foreclosure of their home. The new program should also help stabilize the housing market by preventing more foreclosures. This is good for everyone.