New Short Sale Rules for Fannie and Freddie Part II
Saturday, October 27th, 2012 by attorney Chris Hacker
Next Thursday some substantial changes will take effect for newly submitted short sale applications to Fannie Mae and Freddie Mac. In my last post, I highlighted four of the changes. In this post, I’m going to highlight three more.
- Active servicemember relocation
- Property valuation
- Allowable costs
Servicemember Relocation due to Permanent Change of Station Orders
If you have dealt with an active member of the military having to sell a property short, then you are probably aware of the HAP program. This program applied to specific bases and the service members that purchased homes around them in a specific time period. The details of the HAP program are available here. However, the new rules specifically recognize Permanent Change of Station orders (“PCS” orders) as an eligible hardship that not only qualifies the servicemember, but also automatically provides the servicemember with a full release of liability and prohibits a lender from asking for a cash contribution or a promissory note from the servicemember.
As anyone who has touched a short sale before knows, the lender’s valuation is pretty much the whole shooting match. If the bank’s BPO (broker’s price opinion, for the uninitiated) is too high, at best you have a valuation fight on your hands. In the new regulations, Fannie requires a BPO be completed, but leaves it open to the servicer whether it is an interior or exterior BPO. Freddie’s regulations appear to require an interior BPO. In either case, the value is good for 90 days; the approval must be issued within that 90 day period, or a new valuation will be required. The regulations themselves are silent on whether to include distressed comparables or not in the valuation, so it will still be up to you to ensure that both the BPO agent and the servicer are including distressed comparables.
Allowable Closing Costs
Both Fannie and Freddie have provided guidance on what fees are allowable and what fees are not. On the allowable side are real estate commissions less than or equal to 6% of the purchase price, transfer stamps, title and settlement charges typically paid by seller, seller’s attorney fees for settlement services, termite inspection and remediation if required or customary, past due HOA fees, and typical credits from the seller. On the not permitted category are buyer’s discount points and loan origination charges, real estate commissions paid to either the seller or the buyer, and short sale negotation fees paid out of the net proceeds or charged to the seller by a third party or the servicer. This last one is worth noting, as it does not prohibit third party fees or other short sale fees. It only explicitly states that the net proceeds may not be reduced by those fees and that the seller may not be separately charged for those fees. That leaves a lot of people that could be paying those kinds of fees. The more obvious is a buyer charge for either negotiation of the short sale by a third party or evaulation of the buyer’s offer by the servicer. The less obvious is a servicer’s charge to an agent as a requirement for short sale approval. I have seen more than one instance where the servicer was tacking on a 1% fee for the inconvenience of dealing with the short sale.
I will wrap up the overview of this topic in my next post, addressing a few of the remaining items that deserve some attention.
In the meantime, if you want to read the short sale guidelines yourself you can click below to get my cliff notes version of the actual announcements and regulations themselves.