A Few Reasons to Go Long on Short Sales
With nearly 5 million borrowers at risk of foreclosure, short sales are playing a growing role in helping struggling homeowners avoid foreclosure. When all home retention options have been exhausted, a short sale is a good alternative that allows distressed homeowners to gracefully exit their home and transition into more affordable options. It’s also typically less damaging to a borrower’s credit report than foreclosure, and usually reduces the amount of time a borrower needs to wait to get a new mortgage in the future.
Homeowners are not the only ones who may benefit when foreclosure is avoided through a short sale. In fact, nearly every stakeholder benefits. Short sales reduce nonperforming loan servicing costs for servicers and potential loss and expense associated with REO and foreclosures for investors, and mortgage insurers can benefit from the possible reduction in claim losses and REO expenses. Furthermore, neighborhoods whose property values would ultimately suffer as a result of a foreclosure benefit from the higher sales prices that usually occur in a short sale. It’s also good news for local governments whose tax revenue has been impacted by the recession, as they will get their taxes paid quicker and in full.
Tips for Getting a Freddie Mac Short Sale
- Make an offer that is at fair market value
- Work with your real estate agent to make contact with the mortgage servicer
- Submit all needed documentation on time
- Ensure your agent is negotiating with all necessary parties, including subordinate lien holders and homeowners associations
- Do everything you can to facilitate and accelerate the closing process
Short sales have been in use for years, but they served a more niche purpose than the more mainstream foreclosure avoidance alternatives that we are seeing in today’s market. For example, in 2000 short sales accounted for approximately 4 percent of our completed workouts as compared to nearly 14 percent last year. This has led to several challenges for real estate agents and prospective homeowners.
First, many real estate agents new to the short sale experience are unaware that they need to be involved in the negotiation with all parties, including second lien holders and mortgage insurers. Documentation also plays an important role – completing and submitting the required documentation on time is critical for a timely review and decision. Third, are the challenges around reaching qualified borrowers, given the large numbers of investor properties and vacant homes. Moreover, many distressed homeowners do not fully understand their options, and often believe foreclosure is the only alternative.
Compounding these challenges is the fact that short sales are complex transactions that involve multiple parties. Typical real estate transactions usually involve four primary parties – the real estate agent, the buyer, the seller and the lender. Short sale transactions can have up to three times more parties in the mix and add months to the process.
The good news is that the industry is making strides at improving short sale awareness and transactions through education, training and streamlined programs. At Freddie Mac, we share this commitment, and we’re working to make it easier for real estate agents and struggling homeowners to get short sales on our loans. We’re doing this by streamlining document requirements, delegating approval authority to servicers and providing quicker decisions in-house. In fact, once we receive the completed short sale package the decision only takes an average of four days! For agents, we implemented training programs about Home Affordable Foreclosure Alternative short sales and the Freddie Mac short sale option while paying full commissions to them to pursue these options. And we’re making sure homeowners understand their options by participating in foreclosure prevention workshops around the country and by maintaining a robust online information center at FreddieMac.com.
Helping homeowners avoid foreclosure and servicers reduce expenses are only a few reasons to go long on short sales. Ultimately, all of our efforts add up to a healthier housing market and that’s good for everyone.
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