Credit-preserving short sales get new federal boost

New federal rules took effect Monday to speed up short sales — the time-consuming, often-frustrating process of selling a home when the owner owes more than the house is worth.

The Obama administration program offers financial incentives for homeowners to agree to a short sale. Owners will still lose their homes, but a short sale, or deed in lieu of foreclosure, doesn’t hurt a borrower’s credit score for as much time as a foreclosure.

A man browses homes for sale in Los Angeles. Federal rules implemented Monday will aid quick home sales for owners who owe more than their homes are worth.

The new rules let lenders use an appraiser, market research and a real estate agent’s opinion to determine the value of a home, and thus a minimum to accept. Mortgage companies must set their minimum bid before the house is listed for sale, and if an offer is above that, the lender must accept it. Typically, lenders didn’t decide how much they would accept until after they had received an offer.

The rules give a time and home-value certainty to a short-sale process that essentially had had no parameters. The previous process had left sellers and potential buyers in limbo, said David Hanna, managing broker with SourceOne Realty in Chicago.

Banks and lenders typically look at short sales with skepticism because they are fraught with the potential for abuse. That means banks had taken time to scrutinize the sales, Hanna said. Banks are unsure of the appraised value of the home and have been burned by such frauds as homeowners lying about whether they are employed or a homeowner’s financially viable sibling using the process to get the property for a song, for example.

Lenders lose about 40 percent of a property’s value on a foreclosure vs. about 19 percent on a short sale, according to industry estimates.

The new rules also require that, for the first 30 days that a home is marketed, the lender may approve only offers that result in minimum net sales proceeds of 88 percent of the home’s appraised fair market value.

Such guidelines should help give banks the certainty they need to move more quickly to approve short sales, Hanna said.

The plan also offers incentives to homeowners. The program will pay a homeowner $3,000 in moving expenses — up from an original $1,500. And HUD will pay up to 1 percent of the buyer’s mortgage as part of the closing costs if the new mortgage falls under the Federal Housing Administration program.

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