If you’re one of the estimated 11 million homeowners burdened with an underwater mortgage, a new federal policy change could be good news: Starting in June, when you want to do a short sale to shed your mortgage debt load and avoid foreclosure, you may not have to wait for months to hear back from your bank when you submit an offer from a potential purchaser.
Instead, if your loan is owned or securitized by either of the dominant conventional mortgage market players — Fannie Mae or Freddie Mac — you can expect a response within 30 business days, with a final decision no later than 60 days. If you don’t hear back during the first 30 days, the bank will be required to send you weekly updates telling you precisely where the holdups are and when they are likely to be resolved. None of this is typical of short-sale procedures today. Banks and servicers who don’t comply will face monetary and other penalties.
The mandatory timelines, which real estate and mortgage industry experts say should help speed up what traditionally has been a glacial process, are being imposed by the Federal Housing Finance Agency, the regulatory overseer of Fannie and Freddie in conservatorship. Short sales represent an important alternative to foreclosure, and involve the lender or loan servicer agreeing to accept less than the full amount owed by the borrower.
Though they can be complex and messy, and can take anywhere from several months to more than a year to complete, short sales are turning into a mainstay of the real estate market. According to a report from the foreclosure data firm RealtyTrac, short sales jumped by 33 percent in January compared with the same month the year before. In 12 states — including California, Arizona, Colorado, Florida, New York and New Jersey — there were more short sales recorded during January than sales of foreclosed properties.
This trend is welcome, say regulators, but the total time required to complete short sales is still far too long. The 30-day and 60-day mandates address just one of the key points of delay in the process, but regulators promise a series of additional steps during the coming months designed to speed transactions. They include clearer guidelines on borrower eligibility, property valuations, compensation for lenders holding second liens, and mortgage insurance issues. All of these are points of friction that can delay short-sales agreement for weeks or months.
Real estate agents who specialize in short sales say setting mandatory timelines is a step in the right direction, but won’t solve all the problems. The new rules and promises of more “are great if they really happen,” said broker Erik Berry of Erik Berry and Associates in Sacramento, Calif. Short sales that his firm handles take an average of “about six months” from start to finish on Fannie-Freddie loans. But FHA transactions — which will not be affected by the new regulations — average much longer, and sometimes drag on for a year.
Berry also is skeptical that banks and servicers will be able to reform their staffing practices quickly enough to meet the compressed timelines — even if penalties are imposed. In some cases, he said in an interview, banks switch personnel and negotiators five or six times over the course of a short sale. “You’re dealing with one person one day and they say, don’t worry, everything’s fine, then suddenly they’re gone and you never hear from them again,” leaving the deal stalled for weeks.
Matt Battiata, whose Battiata Real Estate Group in Del Mar, Calif., handles hundreds of short sales a year, said a reliable, 60-day decision deadline for responses to offers will be helpful — 30 days better than the 90-day average he now sees from banks — but the whole process will still take longer than traditional sales. For clients seeking to do short sales today, Battiata estimates five to six months from offer to closing. After June, assuming the new federal rules and penalties work, the estimate might only be cut by a month.
On top of this, some of the complications inherent in short sales are beyond the control of regulators or banks, he pointed out. For instance, buyers put in offers to purchase but then change their minds, forcing the sellers and brokers to come up with replacement offers, and the bank to reset the clock to analyze the new package.
The takeaway for potential short sellers: Be aware of the new moves afoot to streamline the process but don’t expect miracles.
Ken Harney is a syndicated real estate columnist.