Short Sales – Short Sales S.A.F.E. Act

Posted by dagmar | |

SOOOOO, WHAT IS NEW WITH SHORT SALES???

2007 Tax Payer Relief Act is extended through 2012 with the passage of the Emergency Economic Stabilization Act of 2008 aka the bank bailout.  Under IRS Publication 4681, forgiven debt for an individual is treated as income for tax purposes.  The 2007 Tax Payer Relief Act aka the Mortgage Debt Relief Act of 2007 states that forgiven debt is no longer treated as income for tax purposes under certain limited circumstances.  The forgiven debt must have been used to buy, build or substantially improve an individual’s principal residence.  Maximum amount an individual can claim under the 07’ Tax Payer Relief Act is 2 million dollars. 

Short Sales and the S.A.F.E Act:  The Georgia Residential Mortgage Act as modified by the Secure and Fair Enforcement for Mortgage Licensing Act prohibits any person from engaging in the activities of a mortgage loan originator without first obtaining and maintaining a mortgage loan origination license.  Per the Georgia Department of Banking and HUD, a real estate agent cannot negotiate the terms of a seller’s existing loan (including short sales) without first obtaining and maintaining a mortgage loan origination license.  Long short of it is that you can facilitate a short sale transaction by providing the lender with information but you cannot negotiate the terms.  (I.e. Deficiency, forbearance, etc…)  Be careful about signing an authorization form that allows you to negotiate the terms- add language which clarifies your role.  You can discuss terms and relay information but you cannot negotiate the terms as you are not a licensed mortgage loan originator.  Hopefully, GAR is successful in their marketing efforts to get the language changed.

You cannot: 

  1. Negotiate a forbearance or have the lender stop foreclosure proceedings because you think a deal is imminent. 
  2. Negotiate a release of personal liability for your client to avoid a deficiency.
  3. Negotiate any terms of the short sale agreement.
  4. Negotiate with subordinate lien holders.  Per HAFA, the borrower/seller has a duty to negotiate.
  5. Give tax advice.
  6. Give advice as to how it will impact their credit.

You CAN:

  1. Hold yourself out as a specialist.  However you must have experience and training to hold yourself out as a short sale specialist.
  2. Advertise a property as being a short sale.
  3. Prepare a BPO for a seller or a short sale lender.
  4. Provide information to the short sale lender related to the property.
  5. Render an opinion that you think a current offer is fair and that it is the best offer. 

Short Sale Flipping or Flopping:  There are websites such as www.foreclosureuniversity.com which teaches investors how to lower the value on the BPO so the bank will accept a lower price.  Land trusts are being utilized to help homeowner’s beat the transfer restrictions that Fannie Mae, Freddie Mac, and FHA have put into place.  To avoid losing our bar licenses, attorneys must disclose both transactions to all the parties involved.  It is ok to flip so long as all parties have full disclosure. 

Lenders Putting the Right under the Short Sale Agreement to VOID the Transaction and RE-IMPOSE AFTER CLOSING.  The “approval letter” will have language which states if there is fraud or subsequent transfer of the property by buyer within ‘X” number of days after closing, then the lender at their option may void the transaction and foreclose.  This makes a lot of folks very nervous!!  i.e. title companies, attorneys, agents, buyers, and especially lenders.  This language is typically not allowed by the title companies and will halt a transaction until it is removed from the short sale lender’s approval letter/short sale agreement. 

Making Home Affordable, “MHA”:  February 2009, Obama administration put into place the MHA to allow struggling homeowners to refinance as a way to keep their homes and protect property values- this did not work.  In May 2009, this program was expanded to include foreclosure alternatives.  i.e. short sales.  MHA is a voluntary program that lenders can sign up for.  Most all of the big institutional banks loans and all loans owned or secured by Fannie Mae or Freddie Mac are subject to MHA which is 75% of all the residential mortgages.   Under MHA, loan modifications are emphasized.  If the borrowers do not qualify for a loan modification or can’t meet the payment requirements under the modification trial period, the federal government will give monetary incentives for the lender to allow a short sale.  The Treasury Department offers:  $1,000 to servicer for a completed short sale, subordinate lien holders may receive up to $3000 ($2,000 from 1st mortgage lender and $1,000 from the Treasury Department); and, $1500 to the homeowner for relocation expenses.  Program expires on 12/31/12.

Home Affordable Modification Program, “HAMP”:  This streamlines the loan modification process.  In order to do a short sale or deed in lieu a lender must show a good faith attempt at completing a loan modification under HAMP.  To qualify for a loan mod under HAMP, the following requirements must be met:  1. Borrower is delinquent or faces an imminent risk of default; 2. The property is occupied as the borrower’s primary residence; 3. Mortgage was originated on or before 1/1/09 and the unpaid principal balance must be no greater than $729,750 for one unit properties; and, 4. Monthly mortgage ratio of greater than 31%.

Home Affordable Foreclosure Alternatives Program, “HAFA”:  Program starts April 5, 2010.  This program halts the foreclosure process, if one of the three occurs:  1. Borrower applied but does not qualify for a loan mod under HAMP; 2. Borrower fails to make payments during the loan mod trial period under HAMP; or, 3. the Borrower requests a short sale.  If one of the three applies, then the lender must evaluate the borrower’s eligibility of a short sale within 30 calendar days.  Exception in GA and a few other states in that the foreclosure is not halted if the borrower was in active foreclosure before entering the HAMP process, misrepresented any information during the trial period, or did not make all payments in the month preceding the scheduled foreclosure sale. 

Next Steps for a lender under HAFA:  lender must notify the borrower in writing of the potential options for a short sale and the borrower has 14 days to respond.  If the borrower is interested, the lender must review the borrower’s financial information, evaluate the property value, and conduct a title exam. 

Lender must determine the minimum net proceeds that will be accepted to release the lien in full.  The minimum net proceeds amount must take into consideration “reasonable and customary real estate transaction costs for the community.”

Lender then submits to the borrower in writing a short sale agreement setting out the terms of what is an acceptable short sale deal.  The lender may utilize their own agreements. However, the agreements must include all the same information- “uniformity”.  Some of the information included is as follows:

  1.  Expiration date for the short sale to occur cannot be more than 12 months and no less than 120 days.
  2. Property must be listed with a licensed agent not related to the seller and the total commission is capped at 6%. 
  3. Approved list price by the lender or the minimum net proceeds. 
  4. Total amount of closing costs and expenses the lender will allow.
  5. Borrower’s authorization to release their financial info. to the Treasury.
  6. Notice that a contingency clause must be listed in the contract re: short sale approval of the lender.
  7. Must be an arm’s length transaction AND “The purchaser may not sell the property within 90 calendar days of closing.”****
  8. Lender must agree that the borrower will be released from all personal liability.  Lender will not seek a deficiency.
  9. Statement re: potential tax liability.
  10. Monthly payment during the short sale time/window.  Can’t exceed 31% of borrower’s gross monthly income.
  11. Lender will not foreclose during this time as long as this agreement is not violated.
  12. Events that cause the HAFA agreement to terminate which include bad faith on borrower or listing agent, borrower’s financial status improves, changes in the property, or the borrower files for bankruptcy. 

Once the borrower receives the above agreement, the borrower has 14 days to sign and return it to the lender with a copy of the listing agreement and any payoff information on subordinate liens.  Borrower has the responsibility to negotiate payoffs for subordinate lien holders not the listing agent. 

Next steps:  If a purchase and sale agreement is executed during the window period (See #1 above), then the borrower has 3 days to send the contract, buyer’s approval letter from their lender, and the status on all subordinate lien payoffs to the lender.  Lender has 10 business days to approve or deny the contract. 

If approved, lender will issue a final approval letter.  Lender can’t require the closing to take place sooner than 45 days from the date of the sales contract without approval from all parties.  Be mindful of the new lender requirements regarding Truth in Lending under the MDIA- Mortgage Disclosure Improvement Act.  

Steve Golden
Campbell & Brannon, LLC
Partner, Alpharetta Location
770-521-1180
www.campbellandbrannon.com

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