Wednesday, December 14, 2011
Freddie Mac Changes Short Sale Rules
The national government backed Federal Home Loan Mortgage Corporation, Freddie Mac, announced at the end of November that it would be implementing significant changes to short sale regulations in order to reduce liability risks for realtors. The changes were pushed for by the national Association of Realtors, and essentially rewrite the affidavit requirements for buyers, sellers, real estate brokers, and closing agents in short sale transactions.
Freddie Mac had originally implemented the affidavit system to prevent fraud, namely by placing certain obligations on specific parties involved in the short sale – for example, all of the parties were required to certify in the affidavit that the short sale was an arm’s length transaction, and the buyer was required to assure that he would not resell the home within 120 days without making substantial improvements. The new affidavit requirements go into effect on January 1, 2012, however they may be used immediately.
The critical changes to the affidavit regulations include a new phrase that reduces realtor liability: to “the best of each signatory’s knowledge and belief.” The affidavits also require signers to assure against making a “negligent or intentional misrepresentation” in the sale, and signers cannot be responsible for certifying for any other signer. Also, where the affidavit previously could have been an addendum to a sales contract, it must now be a standalone document signed by all parties.
In addition, Freddie Mac adjusted the requirements for lends, including: Short sale negotiation fees may not be deducted from the proceeds of the sale or charged to the seller; A HUD-1 Settlement Statement must reflect any amounts paid to any party connected to a short sale transaction; The seller may only receive payment if it is offered by the servicer, approved by Freddie Mac, and reflected on the HUD-1.
A short sale is often used as an alternative to a foreclosure, since such an arrangement alleviates foreclosure related fees for both the borrower and the lender, although in most instances it negatively affects the homeowner’s credit. In a short sale, the home is sold for less than the amount owed by the homeowner to creditors. The resulting difference in the amount owed and the amount actually collected for the sale is called a deficiency. In many states, lenders are not allowed to go after borrowers to collect the deficiency, however Florida law allows lenders to pursue short sale deficiencies for up to 20 years, often resulting in the garnishment of wages long after the home is gone. Between November, 2009 and October, 2010 there were nearly 83,000 Florida homes listed as short sales, representing about 20% of all homes on the market that year.