New Guidance from Washington on “Underwater” Homes
While everyone is understandably focused on Afghanistan, health insurance reform, Dubai, and Tiger Woods driving ability, the Treasury Department quietly released rules that may have an impact on house sales near you. Specifically, the new rules will apply to “short sales”, where the home is not worth what is owed on it, so the bank will end up “short” money at the end.
Nationwide, roughly 1 in every 4 mortgages is “underwater” — another way of saying the mortgage is more than the market value — but the problem is far worse in California, Florida, Arizona and Nevada. It is very likely that there is such a house in your neighborhood.
In the past, it has been very difficult and time consuming to get a short sale to work. Start to finish, it can take months. To approve the deal, the bank would require stacks of data on the property, the borrower’s finances, and even the details of the transaction itself. Banks being somewhat bureaucratic, sometimes this data would get lost and have to be resubmitted. Because the volume of these sales is unprecedented, the office that approves these transactions is overwhelmed. Often there are other parties with a lien on the property such as a second mortgage or unpaid fees to repairmen and HOAs, and all must be satisfied. The final approval from the bank sometimes required over-riding parts of the contracts covering the sale. This whole process is frustrating for sellers who are trying to avoid foreclosure, buyers who want a home, and all the other people involved.
The new rules don’t apply to every “underwater” sale: the borrower must live there, default must be likely, the mortgage payment must be more than 31% of the borrower’s monthly income, etc.. The banks, under the Making Home Affordable program, will have to give an answer within 10 days rather than a few months. Borrowers will have access to online resources to help speed things along and prevent data from being lost. The bank can now give a “pre-approval” to a short sale that meets certain criteria. The bank’s ability to change the terms of the agreements between the seller, buyer, and real estate agents will be limited. And the Feds will even pay $1000 to the mortgage servicer and the investors and kick in a modest moving allowance for the seller.
The complete guidelines are here, and are recommended reading for real estate professionals and anyone with an “underwater” mortgage. The real question is whether banks will actually play by the rules, or find ways around them as they have been known to do in the past.