Will new short sale guidelines help buyers and sellers?

By Victor Lozada - The Cascade Team Real Estate

Will new short sale guidelines from the federal government help the market and struggling homeowners? These guidelines are intended to create a standard framework for short sales. They could if (and this is a big if) lenders follow these voluntary guidelines. That remains to be seen since previous voluntary loan modifications programs did not seem to spur lenders into making effective modifications.

The short sales guidelines are part of the government’s new Home Affordable Foreclosure Alternative Program, known as HAFA, which is an add-on to the Obama Administration’s more wide-reaching Home Affordable Modification Program launched in early 2009. The idea is that if borrowers are eligible for the modification program but are unable to work out a plan to stay in their home, they—and their lenders—have a well-mapped route for executing a short sale or a deed in lieu of foreclosure.

Currently, short sales are anything but short. It can take weeks and months to get a bank to respond to an offer and many end up rejected. If the bank accepts, they throw out all kinds of roadblocks during the transaction and will even take a competing offer at the last minute. Time and money are lost on these issues. Both the buyer and seller are left frustrated. These issues are leaving a lot of willing buyers on the sidelines.

The only way this will work is if lenders stick to these new guidelines, have the staffing to handle the requests and are actually willing to follow through. It will probably take several months for the lenders to implement these new rules:

For starters, lenders will have a financial incentive to get these deals moving. Servicers get $1,000 to cover their costs, and subordinate lien holders get up to $3,000 through a matching arrangement in exchange for relinquishing their lien. In addition, borrowers receive $1,500 to defray their moving costs.

The guidelines also include standardized forms, procedures, and timelines—and allow the borrower to receive preapproved short sale terms prior to the property listing.

Also, the HAFA rules require that borrowers be fully released from future liability for the debt. That will be a relief to home owners in recourse states who would otherwise remain liable for debt collection. Slightly fewer than half of the states are recourse states.

Help may be on the way to clear out this inventory of distressed homes.