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Update from ATG Administration

Short Sales: Complicating Factors and Keys to Success; IMPORTANT REGULATORY UPDATE
by Karen G. Courtney, Managing Attorney - ATG Short Sale Coordination

As mortgage delinquencies continue to rise and property values fall, many distressed homeowners find themselves in the difficult position of being "underwater," that is, owning a home with mortgage debt that exceeds the value of the home. One option for these homeowners is a short sale. A short sale allows an underwater seller to transfer property for a price that is less than the amount needed to pay all liens, encumbrances (including mortgages and property taxes) and closing costs (including the transfer taxes, brokers' commission, title insurance fees, and attorneys' fees and costs). The short sale process is complex and involves coordinating many parties (e.g., servicers, investors, subordinate lien holders, and mortgage insurance companies), who must all agree to accept a loss on an outstanding debt. As a result, it often takes months to complete a short sale.

Attorneys can help distressed homeowners assess the viability of a short sale by counseling them on the factors that can complicate their ability to obtain short sale approvals. This article discusses some of these short sale approval factors and identifies some keys to success. This article also discusses the new Mortgage Assistance Relief Services Rule (MARS Rule), which was promulgated by the Federal Trade Commission, effective January 31, 2011, and applies to providers of mortgage assistance relief services, which includes "negotiating, obtaining or arranging a short sale of a dwelling."See16 C.F.R. Part 322.

Complicating Factors

To provide the best advice possible, encourage your clients to be honest and forthcoming about their personal and financial information. Here are some factors that can affect the viability of a short sale:

1. Hardship
2. The seller must generally be able to demonstrate financial hardship and an inability to pay his or her mortgage and/or cure the default. Some examples of "acceptable" causes of financial hardship include unemployment, excessive use of credit, illness of borrower, illness in family, death in family, and marital difficulties. The lender is more likely to approve a short sale request if the seller is able to demonstrate that the financial hardship was caused by an event that was out of the seller's control, such as unemployment, death of a spouse, or high medical bills due to a serious illness. The lender's evaluation of the hardship claimed by the seller will be made on a case-by-case basis, and some lenders may be willing to make exceptions to the hardship requirement if it would be in the lender's best interest to approve the short sale.

 

3. Financial Information
4. Sellers must demonstrate that their income cannot sustain their debt levels and that default is likely or imminent. Sellers with the assets or the income to pay the mortgage are less likely to be considered for a short sale. This factor alone does not dictate whether the request for short sale will be denied or approved. If a seller has assets, the lender may approve the seller's short sale request but ask the seller to sign a Promissory Note for the short sale deficiency or contribute funds to the closing.

 

5. Valuation/Marketability
6. The sale contract should bear a reasonable relationship to the property's fair market value. However, determining fair market value is difficult, and in today's market, properties must be priced low enough to attract qualified buyers, yet high enough to convince lenders to accept short payoffs.

   A full appraisal conducted by a certified appraiser or a Broker Price Opinion (BPO) will be required by the lender to approve the seller's short sale request. The appraisal or BPO should reflect valuation based on current values, condition of the property, neighborhood, needed repairs, time on market of area properties, etc. Also, the seller's real estate agent should be present when the BPO is conducted so he or she can provide a market overview, including good comparables supporting the offer, and specific information about the property, which may help influence the BPO in favor of approval of the seller's short sale request.

 

7. Subordinate Liens
8. More than two subordinate liens can drastically affect the likelihood of a successful short sale because each lien holder must agree to a reduced payoff. In many cases, because the short payoff is insufficient to satisfy the senior lien, the senior lien holder may refuse to allow subordinate lien holders to receive any proceeds. In those cases, the short sale is further complicated, as subordinate lien holders have little incentive to release their liens. Notwithstanding, subordinate lien holders often demand payoff amounts that the first lien holder will not approve, causing delays and, in some cases, failure of the short sale transaction to close. Identify these subordinate liens early in the short sale process and insist that all subordinate lien holders agree to accept the payoff amount, if any, that the first lien holder is willing to allow.

 

9. Arm's Length Transaction
10. The lender will require the seller to demonstrate that the sale contract is an arm's length transaction, i.e., negotiated by unrelated parties at a price based upon fair market value. Lenders will often require the parties and their real estate brokers to sign an affidavit confirming that the sale is an arm's length transaction with no hidden terms or agreements among the parties or their brokers and that there are no agreements, whether written, oral, or implied, that would allow the seller to remain as a tenant in the property as tenant or to regain ownership of the property at any time after the successful completion of the short sale transaction.

 

11. Owner-Occupied, Primary Residence
12. Lenders are more likely to consider a short sale when the property is the primary residence of the seller and is owner-occupied. Short sales on investment or rental property, second homes, or vacant homes are less common, as these types of properties can be red flags for lenders and can indicate seller solvency or raise questions of compliance with mortgage guidelines. It is possible to obtain short sale approval of these types of properties, but sellers will need to have experienced real estate professionals advocating on their behalf to convince the lender that it would be in the lender's best interest to approve the short sale.

 

13. Property Insurance Claims
14. Ask your clients whether any property insurance claims were paid on a subject property within the last three to five years. If so, a lender may perceive a paid claim as added value and may expect an adjustment reflected in the short sale payoff. Also, if the seller received the proceeds of the claim, but failed to use the proceeds to make the covered repairs to the property, then the lender may take that information into account when considering whether to approve the seller's short sale request. Inform your clients that lenders can discover information regarding property insurance claims and payouts for any given property by obtaining a C.L.U.E.® (Comprehensive Loss Underwriting Exchange) Property Claims Report in compliance with the Fair and Accurate Credit Transactions Act (FACT Act), which provides a seven-year history of losses associated with an individual and his/her property, providing data for each loss, such as date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name. The FACT Act entitles consumers to obtain one free copy of his/her C.L.U.E.&® Property Claims Report from certain consumer reporting agencies during each 12-month period.

Keys to Success

If a client chooses to pursue a short sale, you can help facilitate the timely completion of a short sale by being mindful of some important keys to success:

1. Set Expectations with Seller
2. Help clients set realistic expectations regarding the viability of the short sale at the beginning of the process. Advise them that each investor controls its own policies for approving short sales and must approve the short sale payoff request. For this reason, not all short sale requests will be approved. Prepare your clients to consider alternatives and possibly the loss of their property in the event that the short sale is not approved.

 

3. Highlight the Importance of Securing a Qualified Buyer
4. When helping clients evaluate whether to accept a buyer's offer, it is important to keep in mind that qualified buyers are even more important during a short sale, when the seller is in financial distress and needs even more assurance that the property, once approved for the short sale, will proceed to a successful closing so as to avoid foreclosure. If the buyer will be securing a loan to purchase the property, it is critical to ensure that the buyer has, at a minimum, been pre-approved for a mortgage by a reputable lender. It may be even more difficult to secure a qualified buyer if the property is a condominium, as many lenders are unwilling or unable to approve mortgages for condominiums for various reasons, including, but not limited to, non-compliance with FHA, Fannie Mae, and/or Freddie Mac guidelines and financial problems with respect to the condominium association.

 

5. Address Short Sale Contract Issues
6. Address potential contract issues pertaining to the nature of the transaction as a short sale within the attorney modification period. If the real estate brokers did not include a Short Sale Contract Addendum (for example, see Short Sale Addendum to Multi-Board Residential Real Estate Contract) in the original contract, then you must require the addition of such a rider. Some issues that should be addressed include the following:
    
   1. Short Sale Payoff Contingency — This provision provides that the contract is contingent upon the successful negotiation with the seller's lien holders and/or third parties of a payoff amount that is less than the total amount owed. In the event that any of the seller's lien holders do not approve the short sale, the contract is canceled and earnest money is returned to the buyer.

    

   2. Extension of Closing Date — This provision provides that the parties agree to extend the contract closing date until such time as the necessary payoffs and approvals are obtained from all lien holders.

    

   3. Right to Continue to Offer Property for Sale — This provision allows the seller to keep the property on the market after the contract is executed in order to increase the seller's chances of obtaining a short sale approval. In the event that the seller receives a bona fide offer to purchase from another prospective buyer, then the seller is obligated to offer the buyer the right to purchase the property on the new terms and conditions.

    

   4. "As-Is" Condition Provision — This provision provides that the contract is for the sale and purchase of the property in "As-Is" condition as of the date of the offer, without representations of any kind, including non-compliance with municipal codes, and further provides that the seller shall not be obligated to undertake repairs, provide credits to the buyer, or establish escrows for repairs. Short sale lenders generally do not allow proceeds to be used for repair costs or repair credits to the buyer.
7. Submit a Complete Short Sale Package to Lender
8. To increase the seller's chances of obtaining short sale approval, submit a complete short sale package to the lender as soon as possible after the lender is notified of the seller's hardship. Short sale requirements vary widely from lender to lender. Begin by contacting the lender by telephone and/or by visiting the lender's website to find out what information they will require in order to process the seller's short sale request. The following is a list of basic documentation that is typically required in order to process a short sale request:
    
   1. Title Search — Order the title search as soon as possible to ascertain the current status of title, e.g., recorded liens and encumbrances, status of payment of property taxes, and any other title defects that might affect the viability of obtaining short sale approval from the lender. All lien holders must agree to the short sale.

    

   2. Authorization to Release Information signed by all sellers.

    

   3. Hardship letter written and signed by the sellers demonstrating financial hardship.

    

   4. Copies of two (2) most recent pay stubs (including year-to-date amount) for each seller.

    

   5. Copies of signed income tax returns (Federal and State) and schedules for the previous two (2) years for each seller.

    

   6. Copies of W-2s from the previous two (2) years for each seller.

    

   7. Copies of bank statements from the most recent two (2) months (all pages) for each seller.

    

   8. Copies of the most recent quarterly statements for any other assets, including, but not limited to retirement accounts, stocks, CDs, money markets, etc.

    

   9. Budget cash flow demonstrating limited disposable income.

    

   10. Most recent escrow analysis reflecting past due taxes or other encumbrances.

    

   11. Preliminary HUD-1 Settlement Statement (HUD-1), reflecting every line item to be paid out of closing as of the projected closing date and the net short payoff amount that each lien holder will receive. Generally, the lender will not allow the seller to receive proceeds from the sale and will not require the seller to contribute to the closing costs. Therefore, the closing statement must "zero out" as to cash to/from seller.

    

   12. Copy of valid, fully-executed contract, along with any and all Riders and Disclosures.

    

   13. Copy of existing listing agreement with stated commissions.

    

   14. Copy of detailed listing history (MLS listing) reflecting market time.

    

   15. Valid appraisal prepared by Certified Appraiser or Broker Price Opinion (BPO).

    

   16. Estimated closing date.

    

   17. Any other documentation or special forms required by the lender(s).
9. Ensure Seller's Representative is Present when the Broker Price Opinion is Conducted
10. Ensure that the BPO being conducted on behalf of the short sale lender is based upon both an exterior and interior inspection of the property. The seller's real estate agent should be present when the BPO is conducted in order to provide a market overview, including comparables supporting the offer, as well as specific information about the property, which may help influence the BPO and facilitate the approval of the seller's short sale payoff request.

 

11. Ensure Seller will be Able to Comply with the Terms of all Payoff Letters
12. Obtain payoff letters that are current as of the date of the closing. Short sale payoff letters are often very detailed. Review all payoff letters and the HUD-1 in concert to ensure that the seller is in compliance with the terms of all letters, including payoff amounts required by/allowed to each lien holder in the event that there are subordinate liens. Resolve any inconsistencies in the payoff letters prior to disbursement.

    Many short sale approval letters also contain restrictions that require notification of the short sale lender of any conveyance that occurs within 30 days after the closing. Some of these letters also allow the lender to void the payoff if the buyer transfers the property or encumbers the property with a mortgage within a certain amount of time after the closing (commonly from 30-90 days). Some short sale payoff letters also state that the short sale lender may void the conveyance after the closing for any reason. These types of restrictions are obviously unacceptable. Sometimes the title company will be able to resolve the issue with the lender or minimize the risk enough to allow the transaction to close. Contact a title company underwriter for assistance with clearing these issues prior to closing.

    Some short sale lenders require funds via wire transfer, while some require a cashier's check. Ensure that the correct fees (e.g., wire transfer fee, cashier's check fee, overnight delivery fee) are included on the HUD-1 and approved by the short sale lender so that the payoff(s) can be made in accordance with the terms of the payoff letter(s). For added assurance that the seller is in compliance with the terms of all payoff letters, submit copies of all payoff letters and the HUD-1 to a title company underwriter for approval prior to closing.

 

13. Obtain Written Approval of the HUD-1 Settlement Statement from Lenders in Advance of Closing
14. To ensure compliance with the terms of the short sale payoff letters, and to avoid delays at closing, submit the HUD-1 to all lenders in advance of closing and obtain written approval of the HUD-1 from all lenders, either by signing the HUD-1, or by e-mail confirming that the HUD-1 as submitted is approved. If the lender later claims that the money was disbursed to the wrong party, the seller's attorney and settlement agent can then produce the signed HUD-1 to show that the lender signed off on the disbursement. For this reason, ATG requires written approval of the HUD-1 by the lenders prior to disbursement of the funds, so it is important for attorneys to arrive at closing with the necessary written approval in their possession. Some lenders refuse to sign the HUD-1 under any circumstances. When dealing with such lenders, ATG requests that you note on the HUD-1 the name and phone number of the person who verified the short sale payoff during the closing.

Federal Trade Commission's Mortgage Assistance Relief Services Rule (MARS Rule) - Effective January 31, 2011

The Federal Trade Commission recently promulgated the Mortgage Assistance Relief Services Rule (MARS Rule" or "Rule), effective January 31, 2011.See16 C.F.R. Part 322. The MARS Rule is designed to protect struggling homeowners from mortgage relief scams and impacts providers of mortgage assistance relief services, which includes "negotiating, obtaining or arranging a short sale of a dwelling."See16 C.F.R. Parts 322.2(i)(6)(i)&(j).

Under the Rule, providers of MARS services are prohibited from making false and misleading claims about their services, are prohibited from collecting advance fees, and are required to provide clear and conspicuous disclosures to prospective consumers in order to protect them from being misled and assist them in making informed decisions when choosing whether to use a MARS provider. See the Rule for particulars. Attorneys are generally exempt from the Rule, provided they comply with the exemption requirements set forth in the Rule.See16 C.F.R. Part 322.7. The Rule also has requirements that attorneys must follow when collecting advance fees. SeeId.

Proceed with caution when working with real estate brokers and third party short sale negotiation companies that perform MARS services as defined in the Rule, as "[i]t is a violation of th[e] rule for a person to provide substantial assistance or support to any mortgage assistance relief service provider when that person knows or consciously avoids knowing that a provider is engaged in any act or practice that violates th[e] rule."See16 C.F.R. Part 322.6.

For the foregoing reasons, read and familiarize yourself with the requirements of the Rule to ensure that you are in compliance and to ensure that any providers of MARS services that you work with are also in compliance.

The Short Sale Process Can Be Daunting - The ATG Short Sale Department Is Available to Help

Short sale transactions often require attorneys to devote significant time to administrative and clerical tasks in order to obtain short sale payoff approvals for their clients. Consequently, many attorneys choose not to represent short sale clients. At ATG, we know that short sales are labor intensive and difficult to complete. For those attorneys who want help with handling the administrative tasks involved in obtaining short sale payoff approvals for their clients, ATG is proud to offer the services of our Short Sale Coordination Department. Our Short Sale Coordination professionals can help streamline the short sale process and maximize the seller's chance of obtaining short sale approval. Our experienced staff will work with the seller's attorney to assemble and submit the documentation the lender will need to agree to the short sale in an efficient and timely manner. ATG takes care of the administrative tasks involved in obtaining short sale approvals so that attorneys can focus on representing their clients.

Our Short Sale Coordination Services involve the following tasks:

• Works directly with attorneys and their clients to assemble and submit documentation in an efficient and timely manner to persuade the lender to agree to the short sale.

 

• Partners with the seller's attorney to prepare and submit the HUD-1 Settlement Statement.

 

• Communicates with lenders and servicers throughout the short sale process&€”saving the attorney valuable time.

NOTE: ATG has implemented procedures to ensure compliance with the Mortgage Assistance Relief Services Rule (Rule) (16 C.F.R. Part 322) promulgated by the Federal Trade Commission. See discussion regarding the Rule above.

For more information, please contact us atshortsales@atgf.comor 312.752.1190.

EDITOR'S NOTE: In the event that this communication is disseminated to the consumer in connection with ATG's Short Sale Coordination Services, the consumer is hereby provided with the following disclosures in compliance with the Mortgage Assistance Relief Services Rule (16 C.F.R. Part 322) promulgated by the Federal Trade Commission:
 

THE TRUSTED ADVISER is published by Attorneys’ Title Guaranty Fund, Inc., P.O. Box 9136, Champaign, IL 61826-9136. Inquiries may be made directly to Mary Beth McCarthy, Corporate Communications Manager. ATG®, ATG® plus logo, are marks of Attorneys’ Title Guaranty Fund, Inc. and are registered in the U.S. Patent and Trademark Office. The contents of the The Trusted Adviser © Attorneys' Title Guaranty Fund, Inc.

[Last update: 3-28-11]