New Foreclosure Alternatives Program (FAP)

Responding to the call of the National Association of REALTORS®, on May 14, 2009, the Obama Administration announced incentives and uniform procedures for short sales under its new Foreclosure Alternatives Program (FAP). For borrowers who do not qualify to have their loans modified on a permanent basis under the Making Home Affordable Loan Modification Program, the servicer may consider a short sale or, if that is not successful, a deed-in-lieu of foreclosure.

Borrowers (Homeowners): Borrowers/homeowners qualify under the FAP if they meet minimum eligibility requirements for the Home Affordable Modification program but don’t qualify for a modification or do not successfully complete the three month trial period. Before proceeding with a foreclosure, servicers must determine if a short sale is appropriate.

Incentives: Incentives include: (1) $1,000 for servicers for successful completion of a short sale or deed-in-lieu of foreclosure; (2) $1,500 for borrowers/homeowners to help with relocation expenses; and (3) up to $1,000 toward the cost of paying junior lien holders to release their liens (one dollar from the government for every $2 paid by the investors to the second lien holders).

Standardized Documents: The program will include streamlined and standardized documents, including a Short Sale Agreement and an Offer Acceptance Letter. The goal is to minimize complexity and increase use of the short sale option.

Property Valuation by Appraisal or BPO: Servicers will independently establish both property value and minimum acceptable net return, in accordance with investor requirements. The price may be determined based on an appraisal or one or more broker price opinions (BPOs), issued no more than 120 days before the date of the short sale agreement.

Timeline: In the Short Sale Agreement, servicers must give borrowers/homeowners at least 90 days to market and sell the property, or up to one year, depending on market conditions. Property must be listed with a licensed real estate professional with experience in the neighborhood. No foreclosure may take place during the marketing period (at least 90 days) specified in the Short Sale Agreement.

Commissions: The Short Sale Agreement must specify the reasonable and customary real estate commissions and costs that may be deducted from the sales price. The servicer must agree not to negotiate a lower commission after an offer has been received.

No Borrower Fees: Servicers may not charge fees to borrowers/homeowners for participating in the FAP.

Program Expiration: The program is in effect through 2012.

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The skinny on Short Sales

When a lender allows a property to be sold for less than the remaining balance on the mortgage loan to facilitate a sale by a financially distressed owner, it’s called a short sale.

 

A short sale can be a winning situation for a buyer looking for a house listed below market value. Mortgage companies typically want to work with buyers and sellers to prevent foreclosures. That’s why, if a seller is current on the loan and the value of the property has fallen, a lender may consider a discounted payoff.

 

However, here’s what you need to know before jumping headlong into a short sale: Lenders have a deluge of foreclosed properties and short sales on their books and, consequently, it can take several weeks to three months for a lender to agree to a short sale offer. Short sales can be frustrating, especially if the lender refuses your bid, pushes back with possible renegotiations, or receives a higher bid. In the event that a second or third lien holder (i.e., entity holding a form of security interest granted over the property to insure the payment of a debt) is not being cooperative, it helps to have a little extra cash on hand to meet unanticipated demands for a larger payoff balance and expedite the process.

 

A REALTOR® experienced in short sales can protect your interests, guide you through each step, check important details, and provide advice when you encounter a speed bump.

One Buyer’s Story

>> William and Mary Ellen Veitschegger submitted an offer in July 2008 for an investment property in Folsom, and their escrow closed in September.

“It is important to research your market. Buyers need to realize the short sale price is only a baseline figure,” adds Mary Ellen Veitschegger. “Our patience was tested during the last stages of the deal when the lender learned there was a second mortgage [a loan holder behind a senior first loan] on the property. They [the second lien holder] wanted us to pay $8,800 more to satisfy them. We were so upset and declined at that point. Fortunately, our real estate agent and the seller’s agent lowered their commissions in order to make the sale happen. We ended up paying $3,000 instead of $8,800.”

Working with a REALTOR® who knew the current housing market was an advantage, says Veitschegger. He explained the pros and cons of the process. “We feel he had our best interests at heart,” she says.

Was the short sale worth it?

“I think we got a slightly lower price, but only ‘time’ will tell,” says Veitschegger.

Resources

>> The National Short Sale Center: While this group focuses on the needs of homeowners, it provides resources on the process, especially under the heading “Press.” See www.shortsalecenter.com .

Good to Know:

• The success rate of short sales is about 50 percent, according to anecdotal reports from lenders and REALTORS®. That percentage should increase as lenders streamline the process.

• A short sale does not involve a foreclosed property. However, the owner of a property can fall into default—and foreclosure—during a lengthy approval process.