Forget What You Know about Short Sales - The Rules Just Changed

There’s an old saying, “It’s not always what you don’t know that hurts you, it’s what you know for sure that isn’t so.”

Agents currently working the short sale market may soon find themselves in this situation. What we’ve been taught about how to do successful short sales will soon work against us and our sellers, because the government just changed all the rules with the new Making Home Affordable (MHA) program. We must do things differently. Very differently,

The Making Home Affordable program is being managed by Treasury and Fannie Mae. It covers more than 85% of mortgage loans, including loans owned or guaranteed by Fannie Mae or Freddie Mac, FHA loans, and loans managed by about 50 of the major servicers. For these loans, the new MHA policies and processes are mandatory.

Good news and bad news
There’s good news and there’s bad news associated with the MHA changes. The good news is that it is actually an attempt to simplify and standardize the short sale process, rules and paperwork. The bad news is that there are tens of thousands of loss mitigators out there who have to be trained before the new program will be implemented in a consistent way. So right now, implementation is patchy at best.

Making sure it is implemented
To speed up the implementation, Freddie Mac has been tapped to audit servicers’ files and fine servicers who aren’t using the new MHA process. With this “big stick” and some financial incentives, the program should pick up speed.

It’s mandatory
Realtors who want to close short sales will need to learn the new MHA rules, guidelines and use the new standard forms. And, yikes! Things are really different under Making Home Affordable. There are some small differences based on whose loan it is, but in general, here are three key changes:

Some of the changes in how you’ll do business
Change #1: There are clearly defined steps which the servicer’s loss mitigator must follow in sequence when a loan is in default (or imminent default ). If attempted refinancing or a loan modification do not work -- then and only then -- will a loss mitigator consider the possibility of a short sale. This is the only time during the loss mitigation process when a short sale will be a possibility. The loss mitigator will use a specific net present value formula to determine if the lender/investor will net more from a short sale than from a foreclosure. The decision is strictly a financial one. This means the short sale attempt will be approved in advance if it is financially to the lender's advantage.

Change #2: You will continue to list with the seller, but the loss mitigator sets the price and the listing term. The listing term can range from as few as 120 days to as long as 365 days. The servicer/lender still must accept the contract which your seller has approved.

Change #3: Good news! Fannie Mae’s Servicing Guide Announcement #09-03 clearly says there is to be no negotiation of short sale commissions. “..closing of pre-foreclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to the level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6% of the sales price of the property in aggregate.” In other words, if you’ve negotiated a listing fee with the seller, the servicer/lender may not ask you to reduce that fee.

Important work -- helping homeowners in distress
This should give you a quick idea of how significant the changes are for the short sale process. In short sales there is a lot more to know, so if you are helping homeowners in financial distress avoid foreclosure, you’ll want to learn all you can about the Making Home Affordable program. This is important work and I’d encourage you to -- Get Involved. Get Trained. Get to Work. America’s homeowners need you.

Editor's Note: Get up to speed on the new short sale process, better assist your clients in financial distress, and position yourself for more success through this new online course with Laurie Moore-Moore. Endorsed by Broker Agent.

Here's an update as of December 10, 2009

(Since the comment section closed in November, I'm adding an update here)

As those of you who are closely tracking the changes made to the Making Home Affordable Program already know, Treasury has reconfirmed some aspects of the Short Sale and Deed-in-lieu program and announced some updates as of November 30, 2009. You can review the full 40-plus page document at the U.S. Treasury’s official website www.hmpadmin.com/portal/docs/news/hampupdate113009.pdf


Some of the “tweaks” to the existing program will take mandatory effect with participating servicer/lenders on April 5, 2010; however, servicers may choose to incorporate the new program details sooner. For the list of Making Home Affordable participating servicer/lenders and their contact info go to makinghomeaffordable.gov/contact_servicer.html


The Home Affordable Foreclosure Alternatives Short Sales Program (with a few new “tweaks"):


Allows the borrower to receive pre-approved short sale terms from the Servicer prior to the property listing. These terms are clearly spelled out in a standard Short Sale Agreement form (SSA) provided by the Servicer and agreed to by the seller. The SSA includes the list price or identifies acceptable sale proceeds which are expressed as a net amount after subtracting allowable costs that the Servicer will agree to. The minimum net amount in the SSA may not be increased until the initial Short Sale agreement termination date is reached (this is not less than 120 days). Servicer may choose to extend the Short Sale Agreement up to a total term of 12 months.
Requires that borrowers be fully released from future liability for the first lien mortgage debt.
Uses standard processes, documents, and time frames.
Provides a $1,500 relocation allowance to the borrower following a successful short sale. Servicers and investors receive government financial incentives as well.
Within three days of receipt of an executed purchase offer, the borrower/listing agent submit to the Servicer a Request for the Approval of Short Sale (RASS) form complete with the executed sales contract and addenda, buyers documentation of funds or lender preapproval or commitment letter, information on status of negotiations with subordinate lien holders.
The Servicer must approve or disapprove the sale within ten business days by signing the RASS and mailing it to the borrower. This should speed things up!
Here’s the specific language from the new directive as it applies to commission, “The Servicer may not require, as a condition of approving a short sale, a reduction in the real estate commission below the commission stated in the SSA.” (The commission negotiated with the seller at time of listing cannot exceed 6%.)
The info above outlines some of the key things to be aware of. There's lots more to know. Read the entire document for more details. It is supplemental directive 09-09 and is available at the first link mentioned above. You’ll also find new information on the Making Home Affordable Deed-in-lieu of Foreclosure program (which has a new rental option) in the same document.

Let’s all hope that this program will result in helping more homeowners avoid foreclosure. As with any government program, it isn’t simple, but it’s at least worth a try.

NOTE: We are revising our Short Sale course online to include the latest program changes, the newest version should be ready mid-January.


Laurie Moore-Moore is CEO of The Institute for Luxury Home Marketing and co-founder of its new division, The Center for Asset Preservation. For information on the industry’s first and only comprehensive training (live and online) on Short Sales under the new Making Home Affordable program, click here. For information on luxury home training and the Certified Luxury Home Marketing Specialist designation, click here.