New Short Sale Guidelines — Wait and See

Under the auspices of the Home Affordable Modification Program (HARP), new guidelines were announced yesterday for “short sales,” when mortgage lenders agree to the sale of a property for less than is required to require the debt against it:

“The U.S. Treasury on Monday set long-awaited guidance on a plan for mortgage companies to speed “short sales” of homes and other loan modification alternatives to stem a rising tide of foreclosures.”  More:  http://news.yahoo.com/s/nm/20091130/bs_nm/us_treasury_shortsales.

It has been fairly common for lenders to take 45 days or longer to respond to short sale offers.  Even after the short sale is “approved,” I have been through contract-to-closing periods of 2 months or more.  And after weeks or months of delay, the lender just calls one day and says, “we’re ready to close now,” acting as if the delay has been someone else’s fault.  Of course simplifying the short sale process should be good news, and I am hopeful.  Having struggled with the existing process a number of times this year, I remain skeptical.

The new guidelines call for a 10-day lender response to a short sale offer.  However, I don’t believe that the long response times in the past were an indication of lenders just “dragging their feet.”  The problem has largely been understaffed and “over-guidelined” loss mitigation departments.  Suddenly asking for response in 20% to 30% of typical response times doesn’t add the staff or eliminate the bank bureaucracies that have made short sales painful in the past.

In addition, artificially capping net proceeds for 2nd lien holders may be attractive from an oversight standpoint, but it doesn’t do anything to resolve the real financial pressures for those lenders who intentionally took subordinated positions.  A very large part of the “problem” loans over the past several years involved 2nd liens.  (80-10-10 or 80-15-5 packages in which the primary lender loaned 80% of the property value and a 2nd lender accepted higher risk for 10% or 15% of property value in the expectation of higher return.)  Just because the Treasury Department now asks them nicely to accept $3,000 maximum proceeds, should that be immediately acceptable to their investors?

It is much too early to try to judge the details and the results of these new short sale guidelines.  I really hope this is progress, but I’ll wait to see some “real world” proof.