Short Sale Blog

Under direction from the Federal Housing Finance Agency (FHFA), Freddie Mac and Fannie Mae have issued new guidelines to their loan servicers about minimum response times for short sales. Starting June 15th, servicers will be required to provide a response to a short sale request within 30 days of receiving a completed Borrower Response Package requesting short sale consideration, or of receiving a purchase offer.

In cases where a decision has not been reached within 30 days, the servicer may take an additional 30 days to reach a decision - but they must notify the borrower within the initial 30-day time limit that the case is still under review. They must also then provide weekly status updates that include an explanation of why the decision is still pending.

These guidelines apply regardless of whether the short sale is being processed through HAFA or through Freddie’s or Fannie’s own short sale program.

Servicers also must promptly acknowledge receipt of documents. They must acknowledge to the borrower that they have received the Borrower Response Package within 3 days. If any items are missing from that package, they must inform the borrower of that within 5 days of receiving it.

These guidelines are similar to those proposed in Senate Bill 2120, which, if passed, would require lenders to make a decision on a short sale request within 75 days, with a possible extension of a further 21 days. Senate Bill 2120 has so far been read twice and referred to the Committee on Banking, Housing, and Urban Affairs.

The majority of conventional mortgages are backed by Freddie and Fannie, so their stricter guidelines (of 30 to 60 days) will apply to most short sales. Although the guidelines come into effect on June 15, servicers are encouraged to start implementing them as soon as possible.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Here is an interesting case, of not being able to see the forest for the trees: the dispute between HUD and CitiMortgage regarding evaluating borrower eligibility for FHA’s Preforeclosure Sale Program (PFS). While HUD focuses on the details of borrower eligibility for the PFS program, CitiMortgage contends that the details of the plan are less important than the overall aim: cutting losses for both borrowers and lenders.

The HUD’s Office of Inspector General has released its new audit report of Citimortgage, Inc. According to the HUD audit report, CitiMortgage did not properly determine borrower eligibility for FHA’s PFS program. Included in the 103-page audit report is CitiMortgage’s response to the HUD claims.

Guidelines for the FHA PFS program are outlined in FHA Mortgagee Letter 2008-43, a letter to all lenders which outlines the aims of the PFS program.

FHA provides mortgage insurance for loans by borrowers who are considered to be “risky” - whose credit history is poor or moderate, or who can only come up with a small deposit.

The FHA PFS program is for borrowers who have an FHA-insured loan, and who find themselves unable to meet their mortgage payments, and unable to sell the home because it is worth less than the balance owing on the mortgage. The PFS program helps borrowers to avoid foreclosure by providing cash incentives to both borrowers and lenders, to encourage them to negotiate a pre-foreclosure sale, rather than let the mortgage proceed to foreclosure.

The dispute between HUD and CitiMortgage comes from different interpretations of eligibility criteria outlined in FHA Mortgage Letter 2008-43. HUD works with numerous lenders; they identified CitiMortgage for this audit because of “an issue identified
in a prior review and a review conducted by HUD’s quality assurance division.”

HUD reviewed 68 loans that CitiMortgage had submitted claims on. Claims paid out by HUD on these loans included mortgage insurance payments (on the deficiency balances) as well as incentive payments to both borrowers and lenders. According to HUD’s review, though, CitiMortgage did not properly determine borrower eligibility for the FHA PFS program for 63 of these loans. A total of nearly $5 million was paid out by HUD to CitiMortgage for those 63 loans. The auditors have recommended that CitiMortgage reimburse HUD for these claims.

The report details, case-by-case, examples where HUD contends that CitiMortgage did not determine borrower eligibility criteria. According to HUD, CitiMortgage did not follow eligibility guidelines detailed in Mortgage Letter 2008-43, including:

• borrowers’ reason for default is a result of an “adverse and unavoidable situation”
• expenses and income claimed by borrowers were not independently verified by CitiMortgage
• borrowers with assets were not required to repay the indebtedness through a repayment plan
• borrowers who were still current on their mortgages were accepted into the plan, and HUD disputes CitiMortgage’s determination of borrowers facing “imminent default”

CitiMortgage has responded to the audit (their response is included in the audit report as Appendix B), defending their practices, and indicating that only 7 of the 63 examples that HUD has presented have any merit.

Most significantly, though, CitiMortgage’s Director of Default Servicing, Brian McWhorter, wrote in his response to HUD:
“In our view, if the changes recommended in the draft report are implemented, the PFS process would slow down and negatively impact borrowers by now allwing them to qualify for a short sales treatment, possibly resulting in foreclosure and a higher loss.”

McWhorter goes on to explain that, in all of the sampled cases, the pre-foreclosure sale that was executed represented a lower loss to CitiMortgage than a foreclosure proceeding followed by an REO sale would have.

Avoiding foreclosure, through FHA’s Preforeclosure Sale Program and through numerous other short sale and foreclosure-prevention programs that exist, is in everyone’s best interest. The faster that short sales can be processed, the more foreclosures will be avoided - and the more quickly our housing market will turn towards recovery.

For more information, download The Homeowner's Guide to the U.S. Government Short Sale Programs, our free in-house guide to the FHA PFS program as well as to VA, HAFA, Freddie Mac, and Fannie Mae short sale programs.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

We reported to you last year that the FHFA’s second-quarter report showed that the number of short sales had increased by 250% over the same period a year earlier.

Well, that trend shows no signs of slowing down!

The number of completed short sales for 2010, at 107,953, was nearly a 200% increase over the number completed in 2009. And the FHFA’s Foreclosure Prevention and Refinance Report for April 2011 suggests that 2011 will be just as strong - with 35,406 short sales already completed as of April.

These rising numbers are especially significant if you take them as percentages of total Foreclosure Prevention Actions (FPAs). FPAs can be divided into two types:

• “Home Retention Actions” which include loan modifications, repayment plans, and forbearance plans
• “Home Forfeiture Actions” which include short sales and deeds-in-lieu

The total number of FPAs processed through the nation’s largest investors, Freddie Mac and Fannie Mae. has actually gone down over the past year, from 82,227 in the month of April 2010, compared to to 57,996 in April 2011. However, the reason that that number has gone down so much (that’s 30% in just one year) is entirely due to the drop in Home Retention Actions.

While Home Retention Actions went down, from 73,052 to 47,347, the number of Home Forfeiture Actions actually went up. As a percentage of the total, short sales went up from 11% (8,741 of 82,227) to 17% 9,701 of 57,996) of all FPA’s, just within the past year.

While many homeowners know that a short sale is the best and fastest way to recover from a mortgage that they can no longer afford, or from a negative-equity situation, loan servicers used to be reluctant to approve short sales. However, servicers and investors are also discovering that short sales are often in their best interest as well, as they may recover more on their loans than they would from pursuing costly and lengthy foreclosures. Several loan servicers have even started to proactively offer cash incentives to encourage their borrowers to pursue a short sale - and that will be the subject of our next blog post.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Mortgage insurance is meant to protect the investor: the borrower pays the insurance premium so that if they default on the loan, the investor is protected. The loan servicer (which, in most cases, is the bank) is only an intermediary in the process. However, a recent report in American Banker indicates that some loan servicers’ position in the insurance deal is a bit too close for comfort - and quite possibly, a conflict of interest with the parties the servicer is supposed to represent. In some instances, loan servicers have force-placed insurance on their borrowers that is up to ten times as expensive as regular insurance: disadvantaging both the borrowers and the investors.

Fo the most part, banks (as loan servicers) negotiate mortgage loans with borrowers, and then they sell those loans to third parties: the investors, such as Freddie Mac or Fannie Mae. The investors pool the loans into mortgage-backed securities (MS), which are usually sold as bonds. The purchasers of the bonds earn an interest payment which is tied to the interest payment made by the borrowers on their mortgages.

Borrowers are required to have mortgage insurance, which protects the investors should the borrowers default on their loans. The loan servicers, once they have sold off the mortgage, become minor players in the deal - just intermediaries. And once they have sold those mortgages, their earnings as intermediaries are low: typically about 0.25% of the value of the mortgage. On a $200,000 mortgage, this translates to about $500 per year.

The American Banker report has uncovered many examples of close business relationships between the loan servicers and the mortgage insurers; in some cases, the insurers themselves are actually owned by the banks. The report quotes Diane Thompson, counsel for the National Consumer Law Center, as saying “There’s no arm’s-length transaction here.” She notes that this situation actually creates incentives for servicers to force-place excessive insurance coverage.

This close relationship may include outright ownership, or it may include kick-backs from insurers: payments to loan servicers. In one example given in the article, loan servicer EverBank replaced its client’s $4,000 insurance policy with a $33,000 force-placed one. They paid specialty insurer Assurant for the policy, and Assurant returned a $7,100 “commission” to EverbBank subsidiary EverInsurance - a payment far greater than EverBank would ever have received from servicing the loan.

In other instances, cases were uncovered where the banks had deliberately let an insurance policy lapse so that they could force-place a more expensive policy - stopping the advance of a delinquent borrower’s escrowed private insurance until the policy lapsed, then purchasing a more expensive policy and advancing payments on it.

These policies do not only harm borrowers - who quickly see the equity of their property stripped away as the large part of any payments they are making (or, if they are not, a growing arrears calculation) as funds go towards unreasonably high insurance policies. (American Banker uncovered one example of a $120,000 property with a force-placed insurance policy costing $10,000 per year - a policy that would soon strip away any remaining equity in the property). These policies also harm the investors, who become increasingly unlikely to recover their investment when borrowers' payments are going to insurance policies, and investment equity is rapidly being stripped.

The issue here is conflict of interest. As the American Banker report notes “there ceases to be a clear difference between the entity purchasing insurance and the entity selling it.” This works out even better for the insurer, because it means that the servicer is less likely to pursue claims (to avoid any apparent conflict of interest, and also because payments on the claims could possibly come from its own profits)) - when in fact, the servicer as representative of the investors should actually aggressively pursue any insurance claims arising from its forcibly insured portfolio.

Many banks are still reeling from the discovery of sloppy documentation practices, a discovery which leads to questions about the legalities of many past foreclosure proceedings - including accusations of “robo-signing,” as well as documentation with signing dates or locations that suggest that they may not have been signed in the presence of a notary, as required by law. These further revelations, of potentially "too close for comfort" ties between loan servicers and mortgage insurers - their lack of arms-length distance, and how their association might be to the detriment of both borrowers and investors - will only add to the mass of paperwork (and possible litigation) related to foreclosure proceedings to be expected over the coming months.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Seattle Short Sales, Inc. has just released The Homeowner's Guide to the U.S. Government Short Sale Programs. This guide covers the FHA, VA, HAFA, Freddie Mac, and Fannie Mae short sale programs. This is the most comprehensive guidebook available to homeowners and is available at no cost. This guidebook shows homeowners how to get their short sale approved in the fastest time possible.

This 40-page resource details the exact steps for getting a short sale approved through each government program. It covers eligibility, incentives, and settlement costs for each program. Included are discussion points, important things to know, and a helpful resource list.

The guidebook is published as a PDF, and can be downloaded by clicking here: The Homeowner's Guide to the U.S. Government Short Sale Programs.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/