Short Sales: Do I or don't I

The ripple effect from the new housing bill that President Bush just signed into law is now underway. One of the provisions in the new legislation gives an unlimited line of credit to Freddie Mac and Fannie Mae to prop them up to stabilize the economy. Freddie Mac has now allocated an unprecedented amount of money to pay banks for each successful Short Sale!

Banks are not really the “lenders”. They are what we in the industry refer to as the “servicer” or the “loan servicer” . Bank of America, Countrywide, Wells Fargo, HSBC, etc. – these institutions merely “service” the mortgages for other investors by collecting payments, sending notices, processing foreclosures, and working out forbearance plans, loan modifications, and Short Sales. Up until recently the Banks hands have been tied. The actual lender of the real money is the investor. So they are the ones that really make the decisions. You’ve heard a lot of talk about them in the news recently. I’m talking about the nations largest investors Freddie Mac and Fannie Mae. These companies are referred to as GSE’s (Government Sponsered Enterprises).

Just a little bit of background on GSE’s…The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the 3 primary borrowing sectors: agriculture, home finance and education. Well, the residential mortgage segment is by far the largest of the borrowing segments in which the GSEs operate. Together, the three mortgage finance GSEs (Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks) have several trillion dollars of on-balance sheet assets.

Freddie Mac has told the banks that they will now pay them $2,200 for each short sale it successfully negotiates.

But the great news is that the banks – the Servicers - will have more incentive to work a Short Sale and there will now be more resources available to staff loss mitigation departments appropriately because the value to the Bank of doing a Short Sale just increased dramatically.

It is absolutely beautiful news that proves that the workout solution of a Short Sale is not only seen as valued, but the preferential method of a pre-foreclosure solution. These changes will undoubtedly translate to shorter processing times and better transactions for all parties involved.

The drawback for approaching short sales till now has been how long it takes to hear anything and that banks take their time.  Now, they are motivated to move quickly!  Between the tax credit and the faster response time of the banks, this is incredible news for people that have been waiting...