Recent data from First American CoreLogic indicates that roughly 200,000 mortgages in Washington are “underwater”, where the mortgage debt outstanding exceeds the current value of the home. Another 74,000 homeowners have so little equity in their homes that further value declines could easily push them into a negative equity situation. No wonder the real estate industry is confronting increasing numbers of sellers who are considering short sales. However, it is important to note that the proportion of negative equity mortgages in Washington is below the level of 18 other states and the District of Columbia. In Nevada, 65 percent of mortgages are underwater, while in Arizona and Florida, over 40 percent of mortgages have balances which exceed value. The state with the lowest proportion of upside-down mortgages was Oklahoma with 6.1 percent. In seven states, there was insufficient data for CoreLogic to compute the results.

Impending foreclosures also influence potential short sale transactions. The Mortgage Bankers Association Delinquency Survey data indicates that about 66,000 Washington mortgages are at least 90 days past due or at some stage in the foreclosure process. According to the Making Home Affordable website, a total of 759,058 borrowers nationally have participated in trial loan modifications under a federal program, 31,382 of which have been converted to active permanent loan modifications. The big problem with mortgage modifications in the last year is that over half have returned to at least a 60-day delinquency status within a year of modification, meaning that distressed mortgages will probably be a persistent problem for some time.  With this high volume of troubled mortgages, short sale transactions have been increasing across the nation. For lenders with widespread losses, a short sale may be more affordable than completing a foreclosure. Borrowers who can’t afford their homes may look to short sales to minimize damage to their credit versus a foreclosure. 

Short sales are complicated and often prolonged transactions so it is important to understand the limitations and recent regulatory changes that come along with short sale transactions. First, only licensed attorneys, real estate agents, credit counselors, or financial professionals are qualified to assist distressed home sellers. Each of these occupations has limitations to the scope of services they can provide. Real Estate licensees may assist sellers in completing a short sale transaction or utilizing any federal programs; however, they are not qualified to advice sellers to take action, as this may constitute unlicensed practice of law.

New federal programs are available that can help home sellers and simplify the process for real estate licensees that facilitate short sale transactions. Real Estate licensees may assist distressed sellers who qualify under the new Home Affordable Foreclosure Alternatives (HAFA) program or the Home Affordable Modification Program (HAMP). To reduce the risk of default, HAMP assists qualified borrowers lower their monthly payments if they are greater than 31 percent of their monthly gross income. Mortgages can be modified on either a permanent or trial basis, depending on the situation. Borrowers who are still unable to afford their mortgage at this level may be eligible for a short sale or deed in lieu of foreclosure under the HAFA program.  HAFA qualified borrowers are given at least 90 days to complete a short sale and may deduct sales commission and expenses from the sale price. Financial incentives for relocation expenses, administrative expenses, and settling liens are provided to the seller. Loans guaranteed by Fannie Mae or Freddie Mac are also eligible under the HAFA program.

A deed in lieu of foreclosure involves the borrower voluntarily relinquishing the property to the lender without the formal foreclosure proceeding when they can no longer afford payments. Typically, the borrower must owe less than the property’s current value. A short sale transaction under the HAFA program allows a borrower who owes more than what the house is worth to receive pre-approved short sale terms before listing the property. The borrower then has the minimum 90-day period to find a buyer before the possibility of foreclosure. Real Estate licensees can use this window of time to find a buyer willing to pay the pre-approved short sale amount. After the sale, the borrower may be released from future liability for the remaining debt. The HAFA program doesn’t take effect until April 5, 2010; however, some lenders may implement the guidelines early.

CLICK HERE for more information on the Home Affordable Modification Program (HAMP)

CLICK HERE for more information on the Home Affordable Foreclosure Alternatives Program (HAFA)