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Changes at Fannie Mae Affect Short Sales and REOs
Fannie Mae announced last August, in sort of a roundabout way, that it was not extending HAFA past December 31, 2012. Which is actually a blessing in disguise for many short sale agents as Fannie Mae HAFA short sales were risky from the get-go for sellers. That’s because Fannie Mae had so much red tape that by the time a seller jumped through of all the hoops, her home could be headed for foreclosure and Fannie Mae was not about to stand in the way of a foreclosure. I’d say that Fannie Mae never met a foreclosure sale it didn’t like.
The thing is if a home goes to foreclosure, then Fannie Mae can put it back on the market as an REO and hope some clueless homebuyer will opt for its HomePath financing program. There are plenty of clueless buyers to go around. The deal with HomePath is there is no appraisal. Is Fannie Mae stupid? No, Fannie Mae may be many things but stupid is probably not one of them. Without an appraisal requirement, Fannie Mae can charge a premium for the REO, and it often does. Sometimes, that premium results in a price that is 10% to 20% or more over market value. That means Fannie Mae HomePath homebuyers are underwater the day they close escrow. Isn’t that brilliant? That’s our government.
Fannie Mae has also changed its short sale procedures from a standard short sale to a traditional short sale HAFA II. It has recently put in place requirements that prevent a buyer from flipping a short sale. That’s OK because most buyers of a short sale owned by Fannie Mae are willing to live in the property and therefore do not want to flip it. They are the most likely buyers willing to put with the crap they have to endure to buy a Fannie Mae short sale. Many investors are not willing to walk down that road with Fannie Mae.
The restrictions state a buyer of a Fannie Mae short sale can’t sell that home within 30 days from closing. OK, that’s not so bad. However, a buyer also can’t sell within 90 days for more than 120% of the sales price. Fannie Mae doesn’t want a buyer to profit from its misfortune. Nothing wrong with that, either. It’s still willing to pay a incentive to the seller to do a Fannie Mae short sale, though, under certain conditions.
Real Estate agents, on the other hand, are screaming about Fannie Mae price fixing — because so many of those Fannie Mae REOs are overpriced — but I don’t know if you can call it price fixing. I am not a lawyer. I suspect a seller can choose to sell a home at whatever price it wants. This is America. There’s a sucker born every minute.
The Seller’s Hardship in a Short Sale
I can often spot a Sacramento buyer’s agent who is new to short sales. They are the guys who start firing off questions the minute they get this short sale agent on the phone. It’s like they are reading from some list of questions to ask a short sale agent, and maybe they are. There is a lot of goofy information online, written by people who are not short sale agents. You can’t blame buyer’s agents for thinking that it’s true because, after all, it’s online, man, it’s on the Internet, it must be true. A smart reader would consider the source before absorbing the data. Sometimes, it’s just an opinion and not fact. And sometimes, it’s a stupid opinion at that.
My absolute favorite question to get from a buyer’s agent is: What is the seller’s hardship? Even if I gave them that information — which I won’t — they wouldn’t know what to do with it. It’s like asking who is the lender; they don’t know what that means, either. They might hear it’s Bank of America and then cringe, because years ago Bank of America had received pretty bad press. However, nowadays, Bank of America short sales are, for the most part, pretty straight forward. So, unless that agent has closed a bunch of short sales herself, she would most likely be clueless about what’s involved or what she could expect to gain from obtaining that knowledge.
It’s none of the buyer’s business what kind of hardship the seller is enduring. That’s personal and private information. Any sensitive information shared by a seller with this Sacramento short sale agent remains confidential. In fact, it’s my fiduciary relationship with the seller that prevents me from disclosing information, apart from ethical reasons. The only thing a buyer or her agent needs to know about my short sales is whether I believe the short sale will close. They don’t get to see the hardship letter.
I’m not disclosing even if there is a hardship in a short sale because not every short sale requires a hardship. Some of my Bank of America Cooperative Short Sales have no hardship whatsoever but they close. If a buyer’s agent wants to know whether a Notice of Default has been filed, the agent can find that information in the property data available online to agents, right alongside the number of loans and identity of the original lenders.
A buyer’s agent is not squeezing the sellers’ personal and confidential information out of this Sacramento short sale agent.
California Short Sale Taxes vs. Personal Liability
A reader from my homebuying website on About.com asked me this morning if he could stop paying on a promissory note after his short sale closed. His short sale agent negotiated, he said, two purchase-money loans in 2010, in which he ended up paying the second lender $5,000, plus he handed over an additional $10,000 promissory note to a credit union. I suspect that the credit union loan was not a purchase-money mortgage because credit unions were not in the business of financing 80 / 20 combo loans. I’m betting that second loan was a hard-money loan. But that’s neither here nor there. The main problem for this guy seems to be that he negotiated a discounted payoff and promised to repay part of it, which he hopes to undo.
This is a pretty good example of short sale confusion. Not only do some people hope that once a law changes or goes into effect that it’s retroactive and can reach back into the past to change agreements or somehow alter things that were legal to do into being against the law — which ain’t gonna happen — but personal liability is often confused with taxation issues. Whether in California a seller has personal liability for a loan after a short sale is a separate issue from whether a seller is liable to pay taxes on that forgiven debt. Mortgage debt relief and whether banks can legally pursue a seller for a deficiency are not the same thing. They are two different things.
But wait, you might say, does this mean a bank might try to collect the balance due on a short sale at the same time the government goes after a seller for taxes on that balance due? Yes, that’s exactly what I am saying. It’s a double whammy.
Fortunately, SB 458, passed in California in July of 2011, added Section E to the California Civil Code 580. It basically says that short of mortgage fraud, in which case it can still pursue, if a seller does a short sale on 1 to 4 units, the bank can’t pursue; can’t go after the seller. But that’s for short sales that closed after July of 2011. It doesn’t matter if the loan was hard money or purchase money, whether the property was owner occupied or a rental, whether the loan was in first, second or third position. Can’t go after the seller. This is a good reason to avoid foreclosure and try to do a short sale. Especially if a seller has a hard-money loan because, legal experts say, foreclosure proceedings do not offer any protection for the seller against a hard-money loan.
But can the seller be taxed on a short sale? On the federal side, for 2013, the mortgage debt relief law has been extended to January 1, 2014. The California law regarding short sale taxes for 2012 has expired. State legislators are working on an extension. This is the part where the law after extension the last time was made retroactive. It took California lawmakers almost a year to pass the extension last go around. We were sweating. But then they made it retroactive. Will they do it again this year? We sure hope so. But this is a classic example of why a seller in Sacramento should get legal and tax advice before doing a short sale. Don’t rely on your Sacramento short sale agent to dispense legal and tax advice because we are not allowed to do it.
Buying After a Short Sale
It is almost mind boggling to look at all the misinformation one can find online about selling a home in Sacramento as a short sale. Not only that, but some of the right information is received incorrectly by the recipient, which is a double whammy. Short sales are complicated. If one is going to consider doing a short sale, one should hire an expert, a Sacramento short sale agent who has closed 100s of them, and there aren’t very many of us around.
I routinely receive calls lately from sellers who want to buy a new home right away. The problem with that concept is it is very difficult to do because a seller has to fit very tight criteria. Generally speaking, the following statement is true: if a buyer can qualify to buy a new home, that buyer will not be considered as a short sale seller by the seller’s bank. Banks are not in the business of giving sellers a break. If your home is underwater, that is not enough of a reason to do a short sale. On top of this, banks typically must follow financial guidelines in which to grant a short sale, and most bank’s guidelines state a seller must have a financial hardship. If a seller has a financial hardship, banks generally don’t lend money to these types of sellers to buy a new home. However, the other side of the coin is it depends on the story, how it is presented to the short sale bank and what the hardship consists of.
Do you see the dilemma? Most people, when faced with dumping an underwater home or staying there and hoping it will someday turn back into the black, will choose doing a short sale. That’s because they can wait out the two years required by most lenders and then buy a new home that is almost identical to the home they sold.
You can’t predict the future with absolute accuracy. But one can compare the past. There are sellers who sold in 2009 and bought again in 2012. They were able to replace their previous home with a better home in a nicer neighborhood for less money than they sold at. Less money, even! It was cheaper to buy a new home. Prices are edging up a little bit in Sacramento but let’s face it, the market is still excellent. Prices are low and interest rates are low. It’s still worth it to short sale now and then buy again in 2 years.
Because who wants to watch a buyer move next door who bought that home for half of your mortgage? If a spouse is not on the mortgage, that spouse might qualify for a new home. Some seller’s parents qualify for a new home for the sellers. There are ways to work around this dilemma. Call a Sacramento short sale agent like Elizabeth Weintraub today at 916-233-6759.
Sending Short Sale Offers to the Bank
I recall way back when short sales first started in 2006 the confusion among real estate agents over sending short sale offers to the bank. Some real estate agents believed that every offer should go to the bank. That’s only because they did not think through the facts. First, the bank does not own the home. Some agents were used to dealing with REO banks and thought a short sale was handled the same way. In an REO, the bank owns the property because the home has already been foreclosed upon and title has been delivered to the bank.
Moreover, some people erroneously describe a foreclosure as the home “going back to the bank.” The home doesn’t “go back” because the bank never owned it. The bank has a security interest in the home but not a real property interest. The home is owned by the homeowner. It is still owned by the homeowner during a short sale.
Second, banks must approve a short sale and agree or counter the terms in the accepted offer. This does not make the bank a party to the real estate transaction, however. It makes bank approval of the short sale a contingency of the purchase contract.
The only offer that should go to the bank is the accepted offer. If the seller wants to accept a backup offer and send the backup offer to the bank, the seller is generally free to do so. In that event, the bank will ask the seller which offer the seller wants to accept. At that point, the seller can certainly point to the backup offer. It is not customary for the seller to send a backup offer to the bank. As long as the submitted offer is reasonable — an offer the bank is likely to accept because it is at or near the comparable sales — that’s the offer that is likely to win approval. That’s the offer a Sacramento short sale agent submits at the seller’s direction for approval.
Banks don’t want to be in the real estate business, too. They have a hard enough time determining fair market value without us Sacramento short sale agents giving the banks the right to weigh the merits of each individual offer. But that’s not stopping a few enterprising entrepreneurs from starting up high-tech platforms that allow banks to receive all offers ever submitted by nitwits. I won’t do them any favors by naming those companies because I just hope in all that is halfway sane in a short sale that it never happens. For everybody’s sake.
