Homeowners could soon have an easier time selling their homes for less than what they owe on their mortgages, under new guidelines from a federal housing regulator and mortgage-finance giants Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency on Tuesday announced measures to make “short sales” of underwater homes easier for homeowners, including extending help to people who have financial difficulties but haven’t missed mortgage payments.
Homeowners whose property values have fallen could have an easier time selling the home for less than the outstanding mortgage amount under changes to be announced by a federal housing regulator.
In a short sale, holders of first and second mortgages, such as home-equity loans, must sign off on the deal because they are accepting less than the outstanding mortgage balance. While short sales help borrowers avoid foreclosure and are thus thought to be in the broad interest of the lending industry and the economy, real-estate agents and home sellers have long complained that they are lengthy and difficult to complete.
Short sales typically sell for a 10% discount to ordinary homes, compared with a 30% discount for foreclosures, said Sam Khater, deputy chief economist at real estate data firm CoreLogic Inc.
One part of the plan is for Fannie and Freddie to place a $6,000 cap on the amount of money holders of second mortgages can receive when the sale is completed, as a way to prevent the mortgage holders from haggling over their slice of the home-sale proceeds. Those second-lien holders would still be able to reject the sales if they saw fit.
Guy Cecala, publisher of Inside Mortgage Finance, a trade publication, said $6,000 may not be enough for many holders of second mortgages, who hold out on approving short sales because they don’t have the right to foreclose on properties and are seeking ways to get paid. “It isn’t a lot to offer,” he said.
The changes only affect underwater mortgages guaranteed by Fannie and Freddie, which back the bulk of U.S. home loans. The FHFA has the authority, as regulator for Fannie and Freddie, to force changes on the lending industry.
The housing regulator didn’t estimate how many people would now qualify for short sales, but about 4.6 million borrowers with loans backed by Fannie or Freddie are underwater, with 80% of those homeowners having missed no mortgage payments.
If more short sales are approved, banks could be forced to record losses on home-equity debt. The biggest holders of second mortgages in the U.S. are Bank of America Corp., Wells Fargo, J.P. Morgan Chase and Citigroup Inc. Representatives of all four banks declined to comment.
Mortgage holders have always needed to ensure that a short-sale agreement is legitimate and competitive, as there have been problems with fraudulent sales.
After seeing her income reduced and running up credit-card debt, Suzanne Gott, a 63-year-old in Mansfield, Mass., listed her home for a short sale in June, asking for $149,000 even though she owes $200,000 on the property. This week, she accepted an all-cash offer of $135,000. “I’m hoping that it’s over as soon as possible,” she said.
The rules go into effect Nov. 1 and also allow homeowners with missed mortgage payments and serious financial problems to submit fewer documents to be approved for a short sale. Homeowners will receive speedier approval if they are experiencing a financial hardship such as a lost job, divorce, death in the family or job relocation.
Earlier this year, the housing regulator set out formal timelines for short sales, saying that mortgage lenders would have to respond to a short-sale offer within 30 days of receiving it.
Short sales have been growing as a percentage of home sales. They made up 8.8% of home sales in May, up from 7.6% a year earlier and 6.5% in 2010, according to CoreLogic Inc.
SOURCE: Wall Street Journal