Short Sale Standards On The Horizon

Fannie Mae and Freddie Mac conservator James Lockhart got an earful about short sales from REALTORS® last week at NAR’s Conference & Expo.

Practitioners complained about lenders’ slow and inconsistent handling of loan modifications and short sales, but Lockhart made it clear there are no quick fixes in the works. “Servicers are stressed,” he told a packed room.

Lenders were unprepared for the drop in housing values and the subsequent rise in foreclosures and short sales and, among other things, the lack the staff or structure to manage the volume of processing they face, he said.

As a result, households are needlessly losing their homes to foreclosure, while real estate professionals are seeing transactions collapse because buyers have too much inventory to choose from to wait around for months while lenders decide whether to accept their short-sale offer.

The problem is on the radar screen of lawmakers in Congress. NAR First Vice President Ron Phipps testified about the scope of the problem before the U.S. House Financial Services Committee this fall, and NAR has made the problem part of the four-point legislative plan that it wants Congress to take up as part of a lame-duck session of Congress before the end of the year.

Lockhart, who heads up the Federal Housing Finance Agency and took over as the conservator of Fannie and Freddie in September, said positive signs are on the horizon.

Foreclosure Prevention

The two secondary-mortgage-market companies are well aware of the market pain and are taking a number of steps to provide relief, particularly to prevent foreclosures.

Among other things, Freddie Mac is allowing lenders to modify their at-risk loans into 40-year, lower interest-rate mortgages and to reduce borrowers’ burdens by permitting them to roll up to six months of missed payments into what amounts to an unsecured second loan. The two companies are also ramping up their staff and adjusting compensation so their internal structure better matches the size and complexity of the processing demand they face.

What’s more, to help facilitate short sales, Lockhart’s agency will be releasing a large-scale, streamlined, standardized process for expediting short sales, which he said will give lenders flexibility and tools like principal forbearance that they can’t easily use right now.

But Lockhart made it clear that the bulk of the problem isn’t with Fannie and Freddie loans, but debt in what the financial services industry calls private-label securities, the Wall Street loans, many of them subprime, that are held by investors all over the world.

The streamlined short sale process his agency will be announcing soon—he didn’t give a time line—could go a long way to focusing the minds of lenders on the problem. But ultimately the problem won’t go way until interest rates come down, buyers start streaming back into the market again, and prices firm up, he suggested.

Robert Freedman

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