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New Short Sale Guidelines Will Help ‘Underwater’ Borrowers

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For the 12 million underwater borrowers facing financial distress and possibly foreclosure, the Federal Housing Finance Agency has released new guidelines for Fannie Mae and Freddie Mac that are likely to stimulate more short sales.

Starting Nov. 1, underwater borrowers whose loans have been purchased or guaranteed by Fannie and Freddie — and are  current on their mortgage payments — may qualify for a short sale if they fit certain hardship criteria, including unemployment, death of the primary or secondary wage earner, divorce, a business failure, long-term disability, or natural or man-made disaster.

Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, a senior vice president at  Fannie Mae in a prepared statement.  “We want to help as many homeowners avoid foreclosure as  possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us. These new guidelines will open doors to help more homeowners qualify for short sales, remove barriers to completing short sales, and make the process more efficient for homeowners and servicers.” 

Previously, short sales have been long, drawn out and contentious deals, taking many months to close. Moreover, short sales have had a high rate of failure and cancellations, leaving frustrated buyers bailing out after waiting for months for banks, loan servicers and second-lien holders to negotiate their differences. Frequently, second lien-holders would scuttle deals because they felt they were not being  properly compensated. Under the new Fannie-Freddie rules, second-lien holders will be entitled to a maximum of $6,000 from proceeds of a short sale.

But  there’s a potential downside for underwater borrowers in recourse states, where Fannie and Freddie have the legal right to pursue “deficiencies” when short sale proceeds do not pay off the existing debt: short sellers should be aware of whether the short sale agreement includes a waiver of the lenders’ right to pursue a deficiency judgment. Or Fannie and Freddie could waive that  right and instead ask borrowers who have sufficient assets or income to make “cash contributions” or execute promissory notes to cover part of the shortfall. Either way, underwater borrowers should consult with a real estate attorney or tax professional before pursuing a Fannie-Freddie short sale.

To find out whether your loan is owned by Fannie or Freddie, visit either www.fanniemae.com/ loanlookup or www.freddiemac.com/corporate. Homeowners can learn more about short sales, modifications and other  foreclosure alternatives at www.knowyouroptions.com.

Search pre-foreclosure short sales, scheduled foreclosure auctions and  bank-owned homes nationwide on RealtyTrac.

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