On August 21, 2012, the Federal Housing Finance Authority [FHFA] announced a new set of short sale guidelines that will be standardized across both the Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC) platforms.
A summary of the guidelines:
- Offer a streamlined short sale approach for borrowers most in need: To move short sales forward expeditiously for those borrowers who have missed several mortgage payments, have low credit scores, serious financial hardships and the documentation required to demonstrate need has been reduced or eliminated.
- Enable servicers to quickly and easily qualify certain borrowers who are current on their mortgages for short sales,
- Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make cash contributions or sign promissory notes: Servicers will evaluate borrowers for additional capacity to cover the shortfall between the outstanding loan balance and the property sales price as part of approving the short sale, and importantly
- Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders to expedite a short sale. Previously, second lien holders could slow down the short sale process by negotiating for higher amounts.
The full document can be found here.
This standardization of guidelines will not move markets, but it should help the markets move themselves. Previously, the GSEs got the standards and interpreted them - often leading to two sets of standards.
With one standard, servicer flexibility on both candidates and deficiency claims and a uniform amount for second lien holders, this could make for at least one less stick in the housing dam.
Keep in mind that short sales typically happen at higher prices than distressed (foreclosure/REO) sales, which supports housing prices and surrounding home values.
One of the potential outcomes of this program is pulling forward what would be distressed sales at short sale prices. While some owners continue to make payments even though they are upside down and in distress, these borrowers will now be able to engage in a short sale instead of adding to the REO inventory and at typically higher realized prices.