Michelle J. Adams, Esq. is an attorney that will be on the Show, Saturday, Oct 27th to discuss
these new guideline for SHORT SALES!
I am writing in response to what I see
as a failure to give attention to one of the major pitfalls in the new short
sale guidelines that were announced by Fannie Mae and Freddie Mac in
August. Every article that I have
read in the media coverage of the new guidelines focuses
on positive changes that are included in their announcements. While I am in agreement that there is a
lot of good news included in the changes that Fannie and Freddie have made,
that does not stop me from wanting to bring attention to the one change that I
believe is going to make getting short sales approved even harder – the
requirement that second lenders agree to accept $6,000 from proceeds to release
their liens and forgive the remaining debt. As someone who has worked on short sales for almost 5 years,
I believe that this is going to cause many homeowners to either file for
bankruptcy or let their properties go to foreclosure.
While this payment to second lenders
is being touted as a positive response to the negotiating that often occurs
between first and second lenders, the addition of the requirement that the
second lien holder must give up their right to pursue the balance is what
troubles me. Ideally do I think that
this is a good requirement? Of
course I do. The states in the DC metro area are all Recourse states. This means that the lenders can reserve
the right to pursue the borrower for any deficiency after completing a short
sale. As an attorney who
negotiates with lenders, we are always trying to work with 1st and 2nd
lenders to try and get them to waive the right and normally it takes an
additional contribution at settlement to get the deficiency waived. This new requirement on the 2nd
lenders will prohibit any contributions going to the 2nd lenders other
than the $6,000 approved by Fannie and Freddie. While this may work with some of the second lienholders, my
experience tells me that small banks, credit unions and 2nd liens
that are greater than $100,000 are not going to grant short sale approvals for
a total of $6,000 (not to mention that if there are 3rd liens, HOA
liens or judgments the total to pay all of them is $6,000); effectively killing
the short sale and forcing the borrower to file for bankruptcy.
Many people are already thinking
through the ways that homeowners with Fannie or Freddie as a first loan can
work around this new requirement. I am sure that for some borrowers who have
the money to try and settle their seconds before completing the short sale,
there will still be options, but for the homeowner who has no money to try and
settle ahead of a short sale and a 2nd lender that will not waive
the right to pursue, short sale will no longer be an option. I cannot say whether or not Fannie Mae
or Freddie Mac were aware that this would be the outcome for many of their
borrowers when the policy makers came up with this requirement, but this will
be the effect – intentional or not.
My firm has already seen the first denial from a second lender that we
have worked with for many years are is known to require the borrower to sign a
new note for the deficiency. Since
they cannot require the borrower to sign a new note, they have declined the
short sale instead. I am sure that
this is just the first of many short sales to be declined where Fannie and
Freddie hold the first loan.
As I noted above, there are a lot of
good changes that were included in the new guidelines and I do not think that
the entire Standard Short Sale program that they are suggesting is bad, but I
want to start a dialog about this particular issue as I believe that it could
have a devastating effect on the number of foreclosures in the near
future. I could be all wrong about
this, but I doubt it.