Category : Short Sales

HUD nixes dual agency on FHA short sales

hudFHA short sales are slow. Very slow.

The thing about short sales is that they are slow going. For most people, when you want something, you want it now. And when you write an offer on a home and have to wait four, six, twelve, or even eighteen months to close, your interest begins to wane.

FHA (Federal Housing Administration) short sales have long been exceedingly slow going and frustrating for home-buyers and sellers alike. You may recall that the Department of Housing and Urban Development (HUD) sets the guidelines for processing short sales for sellers with FHA loans. In my experience, the main reason that these short sales have been slower than others is because HUD requires sellers, buyers, and agents to jump through more hoops (complete more milestones) before receiving short sale approval. For some sellers, this may mean applying for and getting declined for a loan modification prior to beginning the short sale process.

Benefits of the FHA Short Sale

On July 9, 2013, HUD released Mortgagee Letter 2013-23, a letter that appeared to contain good news for short sale sellers and their agents. Effective on October 1, 2013, the FHA short sale will be “streamlined” for many distressed borrowers.

The highlights of the Mortgagee Letter include the following positive changes to the FHA short sale process:

  1. Imminent Default – Certain borrowers do not need to be 30 days behind on mortgage payments to begin the FHA short sale process, just as long as they can demonstrate hardship.
  2. Reduced Documentation – There is now something called streamlined PFS (pre-foreclosure sale) for borrowers that meet certain guidelines.
  3. Up to $3,000 Financial Incentive – Owner-occupant borrowers who successfully sell their properties are entitled to a consideration of up to $3,000 (terms and conditions apply).

Read Between the Lines

Mortgagee Letter 2013-23 is 8 pages long. While the above three positive changes appeared to be the highlights, there is one big lowlight (if there is such a thing).  Buried at the top of page 8 is the following sentence:

“No party that is a signatory on the sales contract, including addenda, can serve in more than one capacity. To meet PFS Addendum requirements, brokers and their agents may only represent the buyer or the seller, but not both parties”

This particular phrase has agents in an uproar. Everyone knows that sometimes a single agent representing both sides of a real estate transaction may not be a good thing. But, what about two agents in the same brokerage? HUD is now going to prohibit that form of dual agency.

In addition to agent dissatisfaction, this sentence also dissatisfied the National Association of Realtors® President Gary Thomas.  In a letter to the Assistant Secretary for Housing, Thomas writes that this policy may minimize the opportunity for sale of many homes in certain parts of the United States. That’s because single brokerages with hundreds of agents under one license dominate in certain areas. And, if none of those agents (all under the same broker) are permitted to bring a ready, willing, and able buyer to the property, how will the property get sold?

Thomas also states that he understands that this HUD policy may have been enacted in order to avoid fraud, particularly problems where pocket listings may net HUD a little bit less money. He points out that Fannie Mae has enacted a more reasonable policy that requires that all Fannie Mae short sales be placed on the MLS for a minimum of five days, thus assuring that all properties are on an open market. Thomas urged HUD to reconsider their policy and adopt the Fannie Mae policy instead.

Depending upon where you live and where you sell real estate, the new HUD short sale policy and all of its associated drama may not impact you at all. But, if you are an agent listing and selling short sales, you’ll want to know what your in for—the improvements to the FHA short sale policy on October 1, and the bad news associated with it.

Home-Affordability-CalculatorFor the millions of Americans who lost their homes in a foreclosure or short sale during the recession, things are starting to look up. In addition to receiving a piece of the $3.6 billion settlement that banks are distributing to borrowers who were wrongfully foreclosed on, some homeowners are now becoming “boomerang buyers” and re-entering the market after a foreclosure or short sale.

Neal Katz, a mortgage agent at All Western Mortgage in Las Vegas, says he fields calls from a number of people wondering how long they have to wait before qualifying for another mortgage. “The biggest hurdle is time,” he says. “Time is the only thing that makes things better.”

Wait times vary depending on individual circumstances such as the size of the down payment and whether the buyer’s home was foreclosed or sold in a short sale. Those who’ve gone through foreclosure might wait three years for a Federal Housing Administration loan or seven years for a conventional loan, according to Katz. The wait time may be closer to two or three years after a short sale. In rare cases, a homeowner who sold in a short sale may be able to get a new loan right away if he or she hasn’t fallen behind on mortgage payments.

[Read: Why You Can’t Afford to Skip Renter’s Insurance.]

Programs aimed at helping borrowers re-enter the market through second-chance mortgages are popping up throughout the country, especially in cities like Las Vegas that were hit hard by the housing bust. Buyers who’ve left the market for several years and meet income requirements may be eligible for first-time buyer programs as well.

Going from owning a home to renting isn’t an easy transition for most people. “It’s very hard on homeowners when they have to go out and ask someone to rent them a house,” says Dianne Langston, a real estate broker in Solano County, Calif. “They’re ready to get out of the rental situation and be a homeowner again.”

Despite the ego blow, that transition time between mortgages offers a chance to save for another down payment and clean up any credit issues. Some people who’ve experienced foreclosure or a short sale also let other financial obligations slide out of frustration or resignation, Katz explains. Now’s the time to tackle those issues. “If you have a small collection account from a credit card, settle it,” Katz says. “Take care of all the other things you can to show the underwriter that you did the best you could. That way, the delinquencies are so long ago that it shouldn’t have an impact on your credit score anymore.”

[Read: Secrets of Successful House Flippers.]

Still, the fact that someone may qualify for a mortgage doesn’t mean they’ll immediately jump back into homeownership. Historically, only 30 percent of borrowers who defaulted on their mortgage in 2001 had taken out another mortgage within 10 years, according to researchers at the Federal Reserve Bank of San Francisco. The researchers also found that borrowers who terminated their mortgages not due to a default (for instance, paying off the house or switching to a larger or smaller house) returned to the mortgage market about two-and-a-half times faster.

Heather Harmon, a Redfin agent in Sacramento, Calif., sees some buyers waiting longer than they need to before buying again because of emotional reasons. “They’ve had to recover psychologically from the experience as much as they’ve had to recover financially,” she says. “You definitely see the buyers who are just mad about what happened. They blame it on circumstances, and they’re afraid of it happening again. In other cases, they’re really embarrassed. They feel exposed, and they’ve got to drag their financials back out again.”

Many people are depressed or discouraged after a foreclosure or short sale, according to Langston, because a house symbolizes their hard work and oftentimes the American Dream. “They don’t understand that it’s not the end of the line,” she says. “I always encourage people by letting them know that they can re-enter the marketplace.”

[In Pictures: 10 Ways Your Home Can Pay You Money]

Harmon recently worked with a couple in their 60s who bought a new home with a Department of Veterans Affairs loan two years after selling their previous house in a short sale. “They weren’t proud of it, but they’re picking themselves up again,” she says, adding that younger homeowners often have a harder time bouncing back from a short sale because of the impact on their kids and the desire to keep up with the Joneses.

While buying a house seemed nearly impossible for the couple thanks to the competitive local market and the longer closing time for a VA loan, Harmon says building a relationship with the seller and the seller’s agent helped the deal close. “We strategized our offer in a way to give the seller everything we possibly could give him because we were bound by the terms of the VA,” she says.

A new bill to improve the process for approving short sales may soon bring relief to distressed home owners who are unable to keep their homes and hope to avoid foreclosure. The bill, introduced in the U.S. House yesterday and strongly supported by the National Association of Realtors®, would impose a deadline of 45 days on lenders to respond to short sale requests.

The legislation, the “Prompt Decision for Qualification for Short Sale Act of 2011,” was offered in Congress by U.S. Reps. Tom Rooney (R-Fla.) and Robert Andrews (D-N.J.).

“The current short sale process can be time-consuming and inefficient, and many would-be buyers end up walking away from a sale that could have saved a home owner from foreclosure,” said NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I.

“Realtors® and consumers continue to raise issues about delays in the short sale process, because lenders are unable to decide whether to approve a short sale. After many months of delays, and with no response from lenders, potential buyers are losing patience and cancelling their contracts, often resulting in the property entering foreclosure. A short sale minimizes the negative impact on sellers and generally costs the lender less than a foreclosure,” said Phipps.

NAR has been actively pushing the lending industry to improve the process for approving short sales, which represent about 13 percent of recent home sales according to NAR data. Phipps praised Reps. Rooney and Andrews for their efforts on the bill and urged Congress to pass the bill quickly.

“As the leading advocate for home ownership and housing issues, Realtors® want to help more home owners avoid foreclosure by facilitating a short sale when a family is absolutely unable to keep their home; however, that can only happen if lenders and servicers approve short sale offers in a reasonable amount of time,” said Phipps. “Streamlining short sales transactions will reduce the amount of time it takes to sell the property, improve the likelihood that the transaction will close and reduce the overall number of foreclosures. This benefits sellers, lenders, buyers and the entire community.”

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.

Information about NAR is available at www.realtor.org. This and other news releases are posted in the News Media section.