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Short Sales Just Got Shorter
When congress realized the housing bubble was truly burst two years ago, they immediately set about making sure the damage was repaired quickly, effectively, and to the benefit of the American homebuyer, the vanguard of the American Dream.
Two years later rules take effect to quickly stop people from losing their…well maybe quickly isn’t the right word, nevertheless these rules. Take effect on April 5th. New regulations aim to make short sales both quick and relatively painless ways to reduce the seismic housing debt currently owed throughout the land.
The Treasury Department realized their bureaucracy wasn’t helping the army of real estate agents, home buyers and sellers wade through the process of a short sale, and so their hope is a reform in regulation will speed up short sales.
Just what is a short sale you might ask? In a short sale, a homeowner sells the property for its current market value, which is less than what’s owed on the mortgage, and the lender agrees to accept the lower amount. The new rules offer participating lenders cash incentives to approve more short-sale deals also allow them only 10 days to approve or reject short-sale purchase offers.
Incentive payments written into the Home Affordable Foreclosure Alternatives Program are designed to help offset some of the financial pain that banks experience when they agree to settle for less than they are owed on a home loan. Mortgage servicers (which are the companies that accept and process homeowners’ mortgage payments) may receive up to $1,000 for the successful completion of a short sale.
Treasury will also pay up to $1,000 to those holding second liens and home equity loans, if they agree to the deal. While junior lien holders have begun to ask for more compensation, the rules now limit incentives to $3,000.
To help speed up short sales, the program calls for lenders to use standardized paperwork and to establish an acceptable sale price before the home is put on the market. Sellers will be allowed at least 120 days to market the home and possibly as long as one year. During that time, the lender cannot foreclose. At closing, the government will give sellers up to $1,500 to cover relocation expenses.
Banks participating in the program have also agreed not to negotiate reductions in real estate agents’ sales commissions after they receive a short-sale contract. Such commission reductions have discouraged some agents from listing and showing short sales, according to the National Association of Realtors.
According to the Treasury rules, a participating loan servicer must offer the short-sale program to a borrower who does not qualify for, or did not succeed at, a loan-modification under the administration’s home affordable mortgage program.
Nationally, 38 percent of all sales in January were distressed sales, which include short sales and foreclosures. In the Washington area, short sales accounted for 6 percent of all sales in Maryland and 8 percent in Virginia during the last four months of 2009. That number is expected to rise significantly in the next several months, according to NAR. Agents have not yet reported short-sale activity in the District.
Some who have worked with short sales, however, are skeptical that the new rules can compress the approval process into 10 days.
“I’ve done five short sales in the past year and, frankly, I don’t want to do another one,” says Cyndy Davis, president of Flaherty Group Realty in Kensington. Her most recent short sale, which required a sign-off from Bank of America, took 10 months.
“I contacted the bank at least every other day, and it still took them 90 days to respond to our first offer on a Silver Spring townhouse,” Davis said. “They took from June until August. Then when we ordered the appraisal, it came in $33,000 below my buyer’s offer. When we resubmitted the new offer, it took the bank another 45 days to respond.”
Mortgage servicers take 90 to 120 days on average to approve short sales, according to NAR. Expediting this process could help banks shed these toxic assets and stabilize the volatile national housing market.
No word just yet on what legislation will be made to alleviate the pain and inconvenience experienced by the people who are thrown out of the houses owned by these poor banks. It’s a shame the message from both sides of the aisle seems to be that Middle America isn’t too big to fail.
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This is good news for the housing industry in general. Allowing short sales would have been a better solution for banks than foreclosing on the property. The time frame for completing a short sale is why banks were shooting themselves in the foot due to their red tape. Instead of being able to sell to a willing seller, they end up with a foreclosed property and nobody interested in buying the property. This is a good change and should improve the sales of distressed homes.
This is great news!