On August 9, 2011, the Treasury Department issued Supplemental Directive 11-08 for its HAFA program. The new policy changes and clarifications of previous HAFA policies are as follows:

Throughout history, the right of a property owner to sell their property on their own terms to a person of their own choosing has been unquestioned. Unbelievably, this fundamental right will be significantly curtailed if not effectively eliminated by proposed new rules from the Federal Reserve implementing the Dodd Frank act. As real estate professionals, if you believe that seller financing is important to this real estate market, we need you to follow the links in this article to learn more about this issue and to make your opinion known. The deadline to officially comment on the rules is this Friday, July 22nd, 2011.

Seller financing has long been recognized as a viable alternative in real estate transactions. With the challenging market today it may become the best solution for turning this market around. One of the biggest trends today is the number of homes that are being sold with seller financing alternatives like lease options, seller carrybacks and “subject to” financing. Sellers are facing increased competition to find a traditionally qualified buyer from an ever shrinking pool.

Short of drastically reducing their selling price, they have to consider alternatives like seller financing to expand the number of potential buyers for their homes. On the other side of the transaction, potential buyers are being kept out of the market because of tightening credit standards and larger down payment requirements. There are large numbers of credit impaired, but otherwise qualified buyers (those with only a short sale or foreclosure on their credit but who still have a good income) who want to buy a home but can’t qualify for traditional financing.

Now, acting in what it calls the best interests of consumers, the federal government has decided that it needs to completely control seller financing in this country. The Dodd Frank Act at first looked like good news for seller financing because it permitted property owners to sell up to three seller financed properties per year without needing to be licensed as a loan originator. Now the proposed rules to implement the seller financing exception under Dodd Frank have been published and they are so onerous as to almost be incomprehensible.

These rules were created for the banks and institutional lenders to follow, but the government has decided in its good judgment the rules should encompass seller financed transactions as well. If these rules are passed without an exemption for seller financing, an individual who wants to sell their own home will be required to understand and comply with rules that span 169 pages and carry significant penalties that could bankrupt a Seller for noncompliance.

I don’t have the time or space to give you more details here before the comment deadline this coming Friday, so I have included several links below for you to learn more about the topic, how you can comment on the rules and also provide you with ideas and suggestions for your comments.

To learn more about the rules and how they will impact seller financing please go to: http://papersourceonline.com/2786/red-alert-seller-mortgages-may-be-outlawed-you-must-act-now/

To submit your comment on the proposed rule, go to the following link and scroll down to the bottom of the page and next to “Comments” click “Submit”.

http://www.federalreserve.gov/newsevents/press/bcreg/20110419a.htm

As real estate professionals who can speak as experts on the importance of seller financing and why it shouldn’t be part of these proposed rules, I urge you to make your voice heard by submitting your comments to the rule. Your opinion as the one’s truly in the trenches today, may carry far more weight than anyone else’s in this debate.

California Senate Bill 458 was signed into law on July 15 and is effective immediately for all short sale transactions the close after July 15, 2011. The law provides that junior lienholders no longer have any deficiency rights against the borrower after a short sale. (A previously enacted law enacted in 2010 banned senior lienholders from collecting deficiencies after short sales).

The new law prohibits deficiency judgments after short sales and further prohibits lenders from requiring payments of any deficiency amounts. Although lenders are prohibited from requiring payment of additional compensation in exchange for short sale approvals, borrowers can voluntarily offer a monetary contribution to the lender in hopes of obtaining a short sale.

The terms of the law also permits lenders to request or negotiate for a contribution from parties other than the borrower, such as from other lenders, real estate agents or other parties.

This law is being hailed as a major victory for borrowers because it removes the potential for deficiency liability after the short sale is completed and thus brings more certainty to the short sale process for borrowers. Additionally, it is hoped that by removing this negotiating impediment, that the short sale process will be quicker and smoother.

What is very important to note is that this law affects all pending but not yet closed short sales. If lenders are aware of the new law, some junior lienholders may try to renegotiate the terms of already approved short sales. This may throw a wrench into short sales that were on their way to closing. However, at the same time some borrowers with pending short sales may receive a windfall because their lenders will not become aware of the new law before their transaction closes and they will escape deficiency liability from a lender who intended to go after them.

An exception to the new law is if the borrower commits any type of fraud related to the short sale. Generally this would involve the borrower lying in the short sale application about their income, assets or hardship status. A second exception will occur if the borrowers commit waste on the property such as intentional damage or they are grossly negligent in their neglect of the property. In these circumstances the lenders would be allowed to seek appropriate damages from the borrower.

There is a significant possibility that the new law may not work as intended. Short sales will still require the approval of all lienholders on the property in order to close. Junior lienholders may be less likely to approve short sales now with the new law. This is because before the law was enacted, a junior lien holder would receive funds from the short sale of a property in which there really was no equity for them. This was in essence a bonus amount that the short sale provided to them and after the sale closed they could then proceed against the borrower for the deficiency.

Now because of the new law, larger junior lienholders may decide that it is more to their financial benefit to simply deny approval of the short sale if in their analysis they believe they will recover more money from pursuing the deficiency against the borrower instead of accepting the small amount they would receive from the short sale. Thus, the law may have the unintended result of reducing the total number of short sales which would force more borrowers into foreclosure. Hopefully, this will not become another example of “consumer protection laws” backfiring on the people it was intended to benefit.

To read and review a copy of California Senate Bill 458 click here:

http://e-lobbyist.com/gaits/text/345467

Just a few short months ago, the Federal Trade Commission (FTC) issued the new M.A.R.S. rules and specifically determined that these new rules would be applicable to real estate agents who list short sale properties. This would require that all the mandatory advertising disclosures be included in all short sale marketing materials. On July 15 the FTC commissioners voted 5 – 0 to stop enforcing most provisions of the new rules against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales from their lenders or servicers.

As a result of the stay on enforcement, real estate professionals will no longer have to make the disclosures required by the rule if they are assisting with the listing or purchase of short sales. It had become evident that the new disclosures were in the context of short cells misleading and confusing consumers and was having the inadvertent effect of discouraging real estate professionals from helping consumers with these types of transactions when more and more American homeowners are seeking assistance with short sales.

Commission stated that the stay of enforcement apply only to real estate professionals who are 1) are licensed and in good standing under state licensing requirements; 2) comply with state laws governing practices of real estate professionals; and 3) assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. The stay exempts real estate professionals who meet these requirements from the obligation to make disclosures and from the ban on collecting advance fees. Agents however, will remain subject to the rules ban on misrepresentations. The commission further stated that the stay does not apply to real estate agents who provide other types of mortgage assistance relief such as loan modifications.

I guess that this is another example of the government hurriedly writing and passing rules to protect consumers from foreclosure scammers without really considering their impact or even asking for input on how the new rules would work in the real world. Because of this lack of foresight, tens of thousands of short sale agents around this country with almost no advance notice were forced to change all their advertising and marketing at great expense or risk violating federal law. Now the rules are as they were before M.A.R.S. was implemented. To read a copy of the FTC’s news release go to http://www.ftc.gov/opa/2011/07/mars.shtm.

Click here to download a PDF of the article

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“In some cases, this scenario, known as a strategic mortgage default, is a business decision for a family, says real estate attorney Lance D. Churchill, co-founder of Frontline Companies, a real estate training company in Boise, Idaho. Even if borrowers can pay the mortgage, when the property value falls to much less than what is owed, they may conclude they are “throwing money into a black hole,” he says.”

It contains some important information for real estate agents who have, or may have in the future, clients who feel that a ‘strategic default’ is their best option. Click the link above and you can download a PDF of the article.

Also, keep an eye out for a special post I will be making soon that will give you some great information and tips regarding short sales and the tax consequences to the Seller. I will cover them all in a post called: “Short Sales and Taxes – Simply Explained”.

One thing I have wondered about in the past is why the two government-sponsored entities, Fannie Mae and Freddie Mac, found it necessary to have different rules for short sales, but then I remembered that the “G” in GSE stood for government and, of course, the government usually makes things more complicated than they should be. Well, on April 28, 2011, the Federal Housing Financing Agency (FHFA), which has been overseeing Fannie Mae and Freddie Mac since their near financial collapse, decided it would be better if they had uniform rules for delinquent mortgages. The FHFA has directed that Fannie Mae and Freddie Mac align their guidelines for servicing delinquent mortgages they own or guarantee with the stated purpose of creating an updated framework that will establish uniform servicing requirements for how delinquent mortgages are handled, including the short sale process. The director of FHFA said, “Once fully implemented, the enterprises’ aligned policies will require earlier contact, more frequent communication and prompt decisions.”

The aligned guidelines will also govern the “dual track” foreclosure process by requiring the servicers to immediately contact delinquent borrowers in an effort to resolve a delinquency. The foreclosure process may not commence if the borrower and the servicer are engaged in a good faith effort to solve the delinquency. In the event that the property is referred to foreclosure, financial incentives would be provided to encourage the servicers to help continue the borrowers pursue a foreclosure alternative such as a short sale.

Freddie Mac and Fannie Mae must issue the new guidelines to their servicers on or before September 30, 2011. Having reviewed the actual and very detailed servicing announcements by both Fannie Mae and Freddie Mac that seems like an awfully long time to implement the new rules. However, given the fact it took Fannie Mae and Freddie Mac eight months to implement a HAFA program that was nearly the same as the Treasury Department’s program, I guess it is reasonable for them to take five months to align their loss mitigation rules.

One of the new policies that agents will like is that Fannie Mae and Freddie Mac will have the same borrower package for borrowers to be considered for all workout and foreclosure avoidance solutions, including HAMP modifications and short sales. When the borrower’s package is received, it is required that at the beginning of the process there be a simultaneous evaluation of borrowers for both the HAMP and HAFA programs. An additional new standard that agents will applaud is that there will be a uniform case escalation process which requires acknowledgement of an escalation request within three business days after receipt and adherence to a 30-day maximum total time to resolve an escalated case.

Since Fannie Mae and Freddie Mac short sales constitute a large portion of the short sale market, new uniform short sale guidelines and procedures for non-HAFA short sales would certainly be welcomed by the real estate industry. Let’s hope that the new guidelines, when they are issued, will actually simplify and expedite the process, and that the servicers will effectively implement the new rules. Stay tuned for updates on this topic, but don’t hold your breath in anticipation of seeing the newly aligned Fannie Mae and Freddie Mac short sale rules very soon.

Currently the changes only apply to the treasury department program and do not apply to Fannie and Freddie 1st Lien loans as well as FHA /VA /RHS loans. However, this may change in the future.

Federal Trade Commission M.A.R.S. Rule Requires New Disclosures From Real Estate Agents Who Negotiate Short Sales For Consumer Borrowers.

The FTC Rule Took Effect on January 31, 2011 and Real Estate Agents Are Subject to Substantial Fines and Penalties For Transactions Without the Mandatory Disclosures.

Most real estate agents are not aware of the new Federal Trade Commission rule that became mandatory on January 31, 2011, which regulates and requires additional advertising disclosures for real estate agents working with short sales.  The new rule at 16 CFR Part 322 is called the Mortgage Assistance Relief Services (MARS) rule.  It was intended to protect consumers in financial distress from fraudulent loan modification companies and similar businesses who promised mortgage relief and retained the consumers money without providing the promised help.  The FTC staff has determined that the definition of what a MARS services in the Rule encompasses short sale agents within its scope.

The definition of a MARS service provider in the Rule includes any person or business who either advertises for short sale business from a consumer homeowner or who negotiates the terms of a short sale with a consumer’s lender.  The scope of the rule pulls in all real estate agents who work in short sales except for agents who exclusively work with short sale buyers and who never negotiate the terms of a short sale with a seller’s lender.

Compliance with the new MARS rule require new disclosures that now must appear in all real estate agents’ advertising and marketing for short sale business.  The required MARS disclosure language varies depending upon whether the advertising is intended for a general audience or is intended for a specific consumer.  The wording in the MARS disclosure may also vary depending upon the type of advertising medium, for example, whether it is print, audio or visual. The FTC Rule includes all traditional marketing channels such as newspapers, flyers, mail and radio and television advertising as well as web sites, sales pages and multimedia presentations on the internet.

When a prospective client turns into a real client and you list the client’s property as a short sale, there are different disclosures that your client must sign as well as new record retention rules for all consumer short sale transactions.  Also, even if you started with a traditional listing, (i.e., a property with apparent equity) once you have a reasonable belief that it may turn into a short sale, you become automatically subject to the MARS rule any you are required to give a MARS disclosure to your client at that time.

Some if not all of the new required disclosure language is very basic knowledge and it is as if the agent is being required to over disclose, such as informing the consumer that the real estate agent is not part of a government agency and warning the consumer that if they stop making their mortgage payment they could damage their credit.   Even if that is the case, the new disclosures are federally mandated and agents who fail to provide the disclosures are subject to fines in excess of $15,000 for each violation as well as being required to return all commissions that were earned in each non-complying transaction.

There are also other provisions of the MARS rule that relate to what you can and cannot say to the seller.  For example, agents will be in violation of the law and subject to prosecution if they tell a client not to communicate with their servicer or lender. You cannot require that all communications related to the short sale must go through you. You also have to be able to back up what you advertise or say to the consumer about your short sale services with clear and competent evidence.  For example, if you advertise that you close all your short sales within 30 days of listing a property or that all your clients receive deficiency releases, you had better be able to prove those statements are true or you could be deemed to have committed misrepresentations in violation of the Rule.  Thus, the new Federal Trade Commission MARS Rule is something real estate agents need to take seriously and you need to do it now.

To learn more about what real estate agents need to know to comply with the MARS rule, take a look at the free MARS video found here. In that video you will find out not only what you need to know about MARS but you will also find information about valuable and exclusive short sale training and a HAFA certification course for real estate agents..

At the end of 2010, the United States Treasury Department in Supplemental Directive 10-18, amended the HAFA short sale rules and policies for non-GSE servicers and lenders.

The effective date for the new HAFA amendments was February 1, 2011. All real estate agents who work with HAFA short sales need to know these new rules and policies — first, because these policies are a significant change from earlier HAFA program rules, and second, because these new policies make the differences between the Treasury Department and the Fannie Mae and Freddie Mac HAFA programs even much greater than they were before.

The new changes include a significant loosening of the income eligibility requirements, greatly expand the number of vacant properties that are eligible for HAFA and provide clarification on payment of 6% real estate commissions, among many other changes.

To learn more about the new HAFA short sale policies, click the movie below to play a five-minute video explaining the new HAFA short sale guidelines.