Last month, we looked at listing potential short sale properties. This month, we consider ways to facilitate successful short sale transactions and support the seller through the short sale process.
A “short sale” is the term most commonly used in real estate to refer to a situation where the proceeds from the sale will not satisfy all the liens on the property and to pay closing expenses, possibly including the broker’s commission. Other times, the total of all liens on the property exceeds the value of the property or what the property can bring on the market. When there are many liens on the property, the different lien holders sometimes negotiate with the owner and agree to take less than the full amount owed rather than suffer the expense and delay of a foreclosure or other litigation. When there is no more room to negotiate with lien holders, either the seller must bring cash to the table or the transaction will fail. Whether a seller will qualify for a short sale is a case-by-case determination to be made by the seller’s lender.
REALTORS® will act as the intermediary guiding the transaction to a successful closing. In any given short sale, the broker may not only be communicating between the buyer and seller but may also be in communication with all the players: appraisers, inspectors, lien holders, judgment holders, homeowner’s associations, condominium associations, legal counsel, tax advisors, loan servicers, mortgage investors and mortgage insurers. The broker may review the WRA Addendum SSL and Addendum SSO with the seller to educate the seller about the short sale process.
Negotiating the Offer
When working with a seller, keep in mind that an offer is accepted when the buyer and seller have agreed to the offer. The accepted offer is then submitted to the lender or the investors for approval of the short sale. Successful transactions will occur when the terms of the accepted offer meet lender criteria for short sale approval. It is important to have qualified, patient buyers drafting offers that will put the seller in the best position to get the short sale approval.
The broker can prepare the seller for success before any offers are presented by completing a sample HUD-1 closing statement. Remind the seller that the numbers are preliminary and will be subject to change. Some sellers are less than candid, and additional fees often seem to appear that must be paid to close the transaction. One source of confusion is when a seller who was current with mortgage payments stops making payments after the property is listed. The payout will be higher than expected since it includes the missed payments and any penalties. If there are third party negotiators, attorneys or tax advisors in the transaction, know in advance how they will be paid for their services, and be sure that all title fees, unpaid utility bills, homeowner association fees, condo fees or assessments, document delivery fees and repair costs are included.
The preliminary HUD 1 gives the seller and lenders a succinct snapshot of the closing expectations. Making it as accurate and complete as possible will minimize surprises when final closing documents are prepared. If the sample HUD-1 is incomplete, the seller may be required to pay unanticipated costs at closing to meet the contractual obligation to the buyer per the offer.
HAFA and HAMP
The Home Affordable Modification Program (HAMP) is a program to assist homeowners to avoid foreclosure by modifying their loans. The Home Affordable Foreclosure Alternatives Program (HAFA) sets forth a uniform process, uniform forms and, perhaps most importantly, firm deadlines for short sales. If the seller qualifies for HAFA, the seller can obtain pre-approved short sale terms before listing the property. If a borrower/seller expresses interest in a short sale to his or her loan servicer and is eligible, per the basic HAMP criteria at makinghomeaffordable.gov, the seller will receive a standardized Short Sale Agreement (SSA) that will give the seller the list price or the net sales proceeds amount acceptable to the servicer and set a maximum limit on closing costs. To find out if the seller qualifies, the seller may contact the Homeowner’s Hotline at 1-888-995-HOPE or visit www.realtor.org/government_affairs/short_sales_hafa. Fannie Mae, Freddie Mac, and some other lenders have similar programs and may be willing to set some sale parameters in advance – the seller will need to ask the lender.
Know the Lender and Know the Process
The role of the broker is to be an intermediary between the seller and the lender, making sure that all information is complete, timely and provided to the appropriate parties. It is crucial for a broker listing a short sale to determine who has the authority to approve the short sale and if an online approval program, like Equator, will be used. Since its launch in 2009, over one million short sales have been initiated through the Equator EQ Platform used by Bank of America, Wells Fargo, ASC, BSI Financial Services and Nationstar Mortgage. If the seller’s loan is with these lenders, the broker should set up an Equator account and view online tutorials to prepare for the short sale process. The Equator portal automatically checks for HAFA eligibility and includes third party contact authorization forms. In Equator, all documents are transmitted online – no more faxing – and securely stored .For more information about Equator, visit www.equator.com/home/index.cfm/solutions.
Broker emphasis in this early stage focuses on organizing seller information such as financial statements, tax returns, pay stubs and bank statements, in proper formats. If tax returns are needed, the IRS form 4506-T Request for Transcript of Tax Return is available at www.irs.gov/pub/irs-pdf/f4506t.pdf. Brokers also must be vigilant in watching the particular lender’s timelines and keeping files active.
Determining Home Value
Scheduling timely BPOs or appraisals is a key step required for lender approval of the short sale. Some lenders have valuation timelines, so watch that the BPO does not expire to keep the short sale moving through the program.
The lender may not be the actual decision maker in the process; instead an investor may make the final decisions. The broker may work with the lender to determine who will be making decisions and the standards that will be applied. A lender or investor typically considers the value of the property, mortgage insurance, second liens and closing costs to calculate the bottom line for approval or disapproval. Instead of refusing an offer flat out, the investor may require the seller to make a cash contribution or enter into a promissory note, or ask for a purchase price increase.
Possible Debt Forgiveness
One of the most important factors for the seller to know is whether the lender(s) will waive any deficiency or pursue the deficiency after the transaction closes. The broker must take caution to not give the seller legal or tax advice regarding any deficiency.
For income tax purposes, the discharge of debt is considered income to the taxpayer. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude up to $2 million of forgiven debt, or $1 million if married, filing separately, on their principal residence from income, provided the discharge is due to the decline in the home’s value or the taxpayer’s financial condition. A seller always should be referred to his or her tax advisor or the IRS for advice concerning the tax implications of a sale or foreclosure. There is also a helpful two-page brochure available at www.irs.gov/pub/irspdf/ p4705.pdf that can be printed and provided to the seller. Visit www.irs.gov/individuals/article/0,,id=179414,00.html for more information.
Homebuyer Tax Credits
Similarly, if the short sale seller asks about the repayment of any homebuyer tax credits, this also is a matter for their tax advisor. For 2008 credit information, see www.irs.gov/taxtopics/tc611.html; for 2009 or 2010 credit information, see www.irs.gov/taxtopics/tc612.html.
The bottom line is that short sales take time. Regular contact with the seller and buyers can go a long way to show the broker’s engagement to help complete the transaction. Even though the decisions are being made by third parties and are out of the broker’s control, keeping the buyer and seller informed will minimize blame on the broker if the deal does not result in a sale.
Short Sale and Broker Risk
Brokers may want to review their errors and omissions insurance policy to determine what short sale services are covered or excluded. Services outside the scope of brokerage generally will not be covered. If the broker gives legal or tax advice or interprets a lender approval letter, the broker may incur liability with no E & O coverage. The broker must resist temptation and not give the seller legal or tax advice when the lender approval letter arrives. Just because short sale sellers protest that they have no money for an attorney does not magically give the broker a free pass to give legal advice.
Potential for Short Sale Fraud
The Subordinate Lien Holders
Brokers and sellers must be cautious of mortgage fraud traps that arise when short sales head toward failure. For example, if the parties pay a junior lienholder additional funds outside of closing, that can constitute mortgage fraud. The best defense is to assure all payouts are included on the HUD-1. A request to close with an incomplete HUD-1 is a mortgage fraud red flag.
Flipping and Lease Backs
Another potential for a short sale fraud scenario occurs when a straw buyer purchases the property and flips it back to the seller or allows the seller to rent back the property with the intent to sell back at a later date. Most lenders today require affidavits from the parties confirming that the transaction is in fact arm’s length, and reject any deals where brokers or family members are buyers, or there is a plan for the buyer to lease the property back to the seller or a quick sale flip of the property.
Information about combatting mortgage fraud with arm’s length affidavits is available on the Freddie Mac website at www.freddiemac. com/singlefamily/news/2011/0906_ala.html.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.