Back in November, new GSE guidelines took effect that promised a great streamlining of the short sale and deed in lieu process, and for the most part they have. I have seen short sale times fall dramatically, and with the proper set up and preparation, it is no big deal to get an approval in less than 60 days. There is a catch, however.
The GSE’s greatly tightened short sale qualification standards. At one point, in 40 percent of the short sales I closed, the sellers were not delinquent. Now, that has been virtually eliminated. Guidelines are also cracking down on hardship, and they are actually reading and researching hardship letters and rejecting many hardship scenarios. Conversely, new GSE purchase guidelines are now coming out that will make it exponentially harder to qualify for a mortgage.
Some of the news rules coming out are the lowering of the maximum LTV to 95 percent, tripling FHA purchase costs and required insurance, and the coupe de grace, severely tightening underwriting and secondary marketing guidelines. As it stands now, when a mortgage originator underwrites a loan to GSE guidelines, they agree to purchase the loan back from the GSE if there is a default within the first 12 months. In other words, a loan originated by Bank of America, then sold to Fannie Mae, would have to be bought back by Bank of America if the loan went into default within the first year (this time can vary).
Under the new rules, if the GSE determines that the proper due diligence has not been completed, and the originator had any reason to believe that the borrower was a default risk, they could be liable to buy back the loan for the entire life of the loan. Think about that. This means that if you ever missed a payment, ever were late on a credit card or car loan, ever did a short sale or ever bounced a check, your mortgage lender will now fear approving you because they would be liable to buy back the entire mortgage if you went into default 20 years down the line. Add in rising mortgage rates, and you have a nice shiny bullet right between any housing recovery’s eyes.
Another landmine to the housing recovery is the perception of property value. As we all know, an appraisal is an opinion of value, and this can vary widely. In most areas, I can find very low comps and very high comps for the same property. This is problematic because on the short sale side, buyers use the lowest comps to justify buying a distressed property.
The director of short sales for Fannie Mae, Tim McCallum, recently revealed that Fannie no longer considers short sales and REOs as distressed property, and therefore will value them no differently that normal retail property. This includes the ludicrous practice of not considering short sale or REO comps when valuing these properties, as if these other sales didn’t exist.
That is a very big statement, because the market definitely distinguishes between the two, and buyers will simply not pay full market rates for the hassle of dealing with a short sale or buying a run down REO. On the flipside, mortgage lenders, underwriting to GSE guidelines, absolutely consider distressed comps, and routinely undervalue their appraisals.
So, we have inflated values on the sales side that are controlled by the GSE’s, and on the purchase side, which is also controlled by the GSE’s, we have the refusal to lend at these inflated prices. This is not the recipe for a comeback. But wait, there is some purchase gold at this tunnel end, and that is the reckless and risky Fannie Mae “Homepath” and Freddie Mac “Homesteps” purchase loans that disregard appraised values and allow 100 percent financing. Sounds suspiciously like the same risky speculating that got us in trouble in the first place, yeah?
How Does This Affect the Market for 2014?
Real estate professionals have long buried their heads in the sand as to what the GSE’s are really doing. This is a mistake. When this much control is exerted by these entities, how long will it be before they start deciding that 6 percent commission is too much? Think it is fantasy? Ask the attorneys, who have repeatedly seen allowable attorney fees cut, now down to $1,500 or less. If you are the only game in town, you get to make the rules to your advantage, and this is the very definition of a monopoly.
Add to that the following situations: increasing mortgage rates; tightened short sale qualifications; GSE control over what buyers and sellers can and can’t do in all aspects of the transaction; short sale property overvaluation by the GSE’s; purchase undervaluation by the GSE’s; hyper restrictive purchase guidelines; and the inevitable implosion of risky Homepath and Homesteps loans.
And finally, add to this the “Shadow Inventory” being quietly held off market by these GSE’s. What will happen when the prices propped up by artificially lowering inventory expires after the GSE’s start to list these shadow properties? They cannot hold them forever. Still think that 2014 will be the year we go back to the good old days? Still think that short sales will go away? Think again.
Joseph C. Alfe worked as a mortgage lending executive with a leading mortgage lender before starting his short sale negotiation company, Short Sale Processors, in 2005. Since then, he has stayed at the forefront of this constantly changing industry as one of the only truly independent, third-party negotiation firms, and has consistently innovated and developed cutting edge negotiation techniques and best practices.
Joseph and his associates have closed nearly 1,000 short sales, and he continues to be active as a short sale coach, consultant, and speaker. SSP is based in Chicago, and negotiates short sales throughout the country. Joseph resides in the northwest suburbs of Chicago with his wife and 5 children.