Greater Boston Short Sales, LLC

Fannie Mae Streamlines Short Sale Transactions

Fannie Mae announced new short sale guidelines this past August in an effort to streamline short sale transactions. The Fannie Mae short sale guidelines, which went into effect November 1st, are designed to simplify the short sale approval process for all loans owned or guaranteed by Fannie Mae. According to the Federal Housing Finance Agency (FHFA), who oversees both Fannie Mae and Freddie Mac, these government agencies back three out of every four residential mortgages in the United States.

The new Fannie Mae short sale guidelines have been successful in that they have taken the guesswork out of many aspects of the short sale transaction. According to the Fannie Mae short sale guidelines, qualified homeowners no longer need to be delinquent on their mortgage in order to be eligible for a short sale, approval timeframes have significantly improved, and all lenders are required to waive deficiency rights against the homeowner. 

This does not, however, mean that the Fannie Mae short sale guidelines are an unmitigated success. Perhaps unintentionally, the new guidelines have resulted in higher lender appraisals, more frequent requests for cash contributions, and the elimination of lender paid third-party short sale processing fees. I examine below the effect of the new Fannie Mae short sale guidelines on homeowners, lenders, servicers and real estate professionals.

Homeowners

No Longer Required To Be Delinquent On Their Loan

Prior to November 1st, 2012, Fannie Mae did not permit lenders or servicers to participate in short sales unless the borrower was in “imminent threat” of default. Imminent threat was narrowly defined as being 31 days or more delinquent on your mortgage payments. Many homeowners, therefore, were told they could not complete a short sale unless they stopped making mortgage payments.

Under the new Fannie Mae short sale guidelines, however, a borrower may be current on their mortgage and still satisfy the imminent threat of default requirement as long as they have a qualified hardship.  Qualified short sale hardships include the death of a borrower or co-borrower, divorce or legal separation, illness or disability or a distant employment transfer or relocation.

This development cannot be overstated. The Fannie Mae short sale guidelines finally provide a definitive answer to the question of whether a homeowner must stop making mortgage payments in order to be eligible for a short sale. As a result, qualified homeowners are now eligible for a Fannie Mae short sale without missing any mortgage payments.

This change is important because missed mortgage payments, not the actual short sale event itself,  determine how a short sale affects your credit score. According to the new guidelines, a qualified homeowner may complete a short sale without ever missing a mortgage payment, which, in turn, won’t negatively affect their credit score.

The Fannie Mae short sale guidelines do clarify, however, that a homeowner must wait two years following a short sale in order to obtain another government backed mortgage loan. In comparison, a homeowner must wait up to seven years following foreclosure and seven years after a bankruptcy.

Deficiency Rights Automatically Waived 

Perhaps the most important effect of the new Fannie Mae short sale guidelines is that lenders and servicers are now required to waive all deficiency rights against the homeowner. As a short sale negotiator, my primary objective is to get the offer approved and get the lender to release the homeowner from all debt obligations. By waiving their deficiency rights, the lender is releasing the homeowner from their legal obligation to pay back the entire mortgage note balance.

The waiver of deficiency rights should not be confused with short sale tax consequences. Once the lender agrees to waive their deficiency rights, they issue a form 1099c to the homeowner. The onus is then on the homeowner to prove to the IRS that they qualify for a recognized tax exemption, such as the Mortgage Debt Relief Act 2007,  so they are not taxed on the cancelation of debt income.

Gone are the days of negotiating a short sale for 3-6 months only to find out at the last minute that the lender would not waive their deficiency rights. This was the ultimate deal killer. Although a major development, it does not come without its disadvantages.

Increased Likelihood of a Cash Contribution or Promissory Note at Closing

Fannie Mae will waive their right to pursue deficiency judgments against the homeowner in exchange for a financial contribution when a borrower has sufficient income or assets to make a cash contribution or sign a promissory note at closing.

The new Fannie Mae short sale requirements set forth the “financial means test” in order to determine whether the homeowner has the financial ability to “share in the loss.” The financial means test takes into account the homeowner’s cash reserves as well as their future debt-to-income ratio.  The loan servicer will review the borrower’s monthly income and expenses in order to calculate his or her debt-to-income ratio.

More often than not, I am finding that solvent homeowners are being asked to make a cash contribution or sign a promissory note at closing under the new Fannie Mae short sale guidelines. Contributions can be as little as $1,000, and most lenders allow the cash contribution to be paid by third-parties.

Subsequent Home Purchase No Longer Disqualifies Homeowner 

In the past, lenders and servicers could not approve a short sale if the homeowner subsequently purchased another property.  This policy affected many homeowners who innocently purchased a new home following an employment relocation or job transfer only to later discover that they couldn’t sell their previous home due to the market collapse.

According to the new Fannie Mae short sale guidelines, the servicer will review a borrower’s credit report for any new mortgage loans during the term of the borrower’s financial hardship. If, during the term of the hardship, the borrower purchased another primary residence, the servicer can approve the short sale without Fannie Mae approval only if the hardship was due to distant or new employment transfer (at least 50 miles away) or receipt of PCS orders.

If the borrower has a hardship other than those listed above, and has purchased another residence during the term of the hardship, the servicer must submit the short sale request to Fannie Mae for written approval. While the new policy likely excludes homeowners who voluntarily upgraded to a larger home before the market collapsed,  it no longer penalizes homeowners who purchased another home following a job relocation.

Less Paperwork

The new Fannie Mae short sale guidelines streamline documentation requirements for all lenders and servicers. Fannie Mae significantly reduced the documentation required to complete a short sale, including requiring no documentation of a borrower’s hardship if they are 90 days or more delinquent and have a credit score lower than 620.  The no proof of hardship policy removes barriers for those homeowners who are most in danger of foreclosure and increases servicer efficiency in completing a short sale.

Lenders and Loan Servicers

Delegated Authority

Pursuant to the Fannie Mae short sale guidelines, all servicers will have the delegated authority to approve and complete short sales on all loans owned by Fannie Mae as long as they conform to the new requirements. It is also important to note that this delegation of authority includes agreements with mortgage insurance companies.

Mortgage insurers provided lenders with insurance polices against homeowner default in exchange for collecting monthly premium payments. When the market collapsed, mortgage insurers weren’t able to pay all of the insurance claims so they successfully negotiated settlements with Fannie Mae and Freddie Mac.

Prior to these settlements, independent short sale approval was required from mortgage insurers on all loans with mortgage insurance. In contrast, the new short sale guidelines enable lenders and servicers to approve short sales without requiring independent approval from underlying investors and private mortgage insurance companies.

By consolidating all short sales into a uniform program and granting delegated approval authority, the new short sale guidelines make it easier for lenders and servicers to process all short sale requests, regardless of whether the loan has mortgage insurance.

Financial Incentives

Under the Fannie Mae short sale guidelines, the US Treasury provides incentive payments to servicers and lenders who comply with the new short sale requirements. In the past, servicers unilaterally prevented short sale approval because they made their money by “servicing” the loan on behalf of lenders or investors and had little incentive to approve the short sale. Apparently, the new incentives are substantial enough to get the lenders, servicers and underlying investors on the same page regarding the objective of the transaction-getting the short sale approved and avoiding foreclosure.

Subordinate lien payments limitations

Fannie Mae now limits subordinate-lien payments to $6,000.  Previously, subordinate lien holders often attempted to negotiate higher payments in an attempt to mitigate their losses.  The servicer will now be able to offer the maximum payment of $6,000 to all subordinate lien holders in order to facilitate the transaction. In setting a maximum payoff amount, Fannie Mae removed the guesswork by standardizing the short sale transaction and requiring all subordinate lien holders to accept a uniform payout amount on every transaction.

Getting first and second lien holders on the same page regarding total payoff amounts is a major step forward in improving short sale approval time-frames because subordinate lien holders no longer have the proclivity to delay the short sale approval in hopes of obtaining a higher payoff. The streamlined procedures and uniform payoff requirements should make the approval process more efficient for both lenders and loan servicers.

Uniform Guidelines

Lenders and servicers now have clear and consistent guidelines making it easier to process short sales because the government has consolidated all existing short sale programs into a single program. Lenders no longer have to keep track of the various program requirements which led to widespread confusion and multiple requests for documents. The end result should be a a more transparent short sale process with quicker approval timeframes and more short sale approvals.

Real Estate Professionals

No More Guesswork

The Fannie Mae short sale guidelines have officially taken (most of) the guesswork out of the short sale transaction for real estate professionals. In the past, the burden was on the third-party short sale negotiator to first determine whether the homeowner qualified for a short sale only to hope that the lender agreed. Often times the loan would be submitted to the lender’s proprietary short sale program only to be removed and re-submitted as a government short sale. This is no longer the case because lenders, servicers and investors are all on the same page due to the single-track program and the uniform eligibility requirements should improve short sale approval timeframes.

No Third-Party Negotiation Fees

Fannie Mae no longer permits third-party short sale negotiation fees to be paid by the lender on the HUD settlement statement. Honestly, lenders and investors have never been on the same page regarding third-party negotiation fees so, on the one hand, it is nice to finally have a definitive rule in place. On the other hand, I find it curious that the investors are unwilling to compensate the individual who is the driving force behind getting the transaction closed. Fortunately, Fannie Mae still offers to pay the full real estate commission as well as all customary seller paid closing costs on behalf of the seller.

Higher Appraised Values

Perhaps the most controversial development, as well as the most frustrating, is Fannie Mae’s minimum net proceeds amount required on all short sales. Most lenders send a local real estate agent to the property to complete a Broker Price Opinion (BPO). In the past, the BPO figure was used as the benchmark value against which the short sale offer was measured.

Under the new Fannie Mae short sale guidelines, however, the investor is demanding a “minimum net proceeds amount well above the lender’s BPO value. The minimum net proceeds amount is derived from the loss Fannie Mae is willing to take on the transaction and has very little to do, if anything, with the BPO value.

One can only speculate that Fannie Mae is attempting to mitigate their losses by demanding higher sales prices. In practice, however, this has caused many short sales to die because the buyer is unwilling to overpay and the seller is at the mercy of the underlying investor. Lenders and servicers are equally frustrated by this development because Fannie Mae is keeping them from getting the short sale incentives. Something is bound to give. Stay tuned…

Fannie Mae Short Sale Guidelines and 2013 Short Sale Forecast

More Homeowners Qualify, Lenders More Efficient

Fannie Mae completed 38,717 short sales through the first six months of 2012 and 70,025 in full year 2011. With the new short sale guidelines, I expect the short sale numbers to be even higher in 2013. The Fannie Mae short sale guidelines demonstrate the government’s latest effort to avoid foreclosure and prevent home values from decreasing further by encouraging loan servicers to participate:

“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, senior vice president, National Servicing Organization, Fannie Mae.  “We want to help as many homeowners avoid foreclosure as possible.  It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us.  These new guidelines will open doors to help more homeowners qualify for short sales, remove barriers to completing short sales, and make the process more efficient for homeowners and servicers.”

Fannie Mae has taken a number of steps to make the short sale process more efficient, including implementing a Short Sale Assistance Desk to help real estate professionals in targeted markets work out challenges in individual short sales, requiring servicers to complete short sale evaluations within 60 days and making military families who receive Permanent Change of Station orders eligible for a short sale.

If you are a Homeowner struggling to make your payments and considering a short sale, visit  www.knowyouroptions.com to determine whether Fannie Mae owns your loan.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo at 617-264-0376 to schedule a free short sale consultation. 

Related Posts:

How Does A Short Sale Affect Your Credit Score

What Are The Tax Consequences of a Massachusetts Short Sale?

Frequently Asked Short Sale Questions

American Taxpayer Relief Act of 2012

On January 1st, 2013 the U.S. Senate overwhelmingly passed legislation to avoid the so-called “Fiscal Cliff” by a vote of 89-8. The bill, referred to as the American Taxpayer Relief Act of 2012, avoided draconian sunset tax provisions that were scheduled to take effect after 2012 under the Bush-era tax cuts. The U.S House of representatives quickly approved the bill by a vote of 257-167. The Taxpayer Relief Act was immediately criticized as falling short of the great tax bargain envisioned during the November elections. While political pundits mostly panned the legislation for being mostly a stop-gap measure, the legislation is absolutely necessary for the recovery of the U.S. housing industry. Specifically, the Taxpayer Relief Act includes an “extender” to the Mortgage Debt Relief Act of 2007, a provision that allows struggling homeowners to avoid paying taxes on the cancelation of indebtedness income  following a foreclosure, short sale or loan modification of their primary residence.

Extension of The Mortgage Debt Relief Act

The Mortgage Debt Relief Act of 2007 enables homeowners to exclude any canceled debt from being taxed as income as long as the indebtedness was incurred on your “qualified principal residence.” Had the extension not been granted, millions of distressed homeowners would have had less incentive to pursue a loan workout or short sale because the forgiven debt would have been taxed as income. Admittedly, the extension of the Debt Relief Act is not the panacea to the sluggish home prices and poor quality of inventory, but the tax relief will undoubtedly aid the housing recovery in 2013 because it will allow homeowners who struggle to keep up with their mortgage payments, after having already experienced declining home values, to avoid further financial penalties following a foreclosure, short sale or loan modification.

Cancelation of Debt as Taxable Income

In general, when a creditor cancels debt, such as unpaid balances on student loans or credit cards, the forgiven amounts are treated as ordinary, taxable income under the Internal Revenue Code. Following a short sale, the Debt Relief Act exemption is triggered when a lender agrees to forgive the homeowner from paying back the remainder of their loan in consideration of a short payoff of their primary residence indebtedness. This amount, known as the loan deficiency, would otherwise be taxed as ordinary income. The entire short sale sale industry, and the current housing sector for that matter, is largely dependent upon the tax exemption afforded by the Mortgage Debt Relief Act because the IRS does not treat the canceled debt as income. As a result, Congress’ last minute agreement to avoid the fiscal cliff will directly aid the housing recovery in 2013 because homeowners will still be able to modify their mortgage and short sell their primary residence without incurring additional tax liability.

Qualified Principal Residence Exception

It is important to point out, however, that the Mortgage Debt Relief Act does not provide tax relief if you short sell an investment property or a home that is no longer your qualified principal residence. Qualified principal residence indebtedness is limited to forgiven or canceled debt for loans under $2 million used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. Thus, even debt incurred as a result of a refinance loan will qualify for this exclusion, but only to the extent that the principal balance of the old mortgage would have qualified. In other words, if the debt forgiven was a result of a short sale of your qualified principle residence, and you never refinanced, you will qualify for the tax relief. If, however, you took out a refinance loan on your principal residence, you will qualify for tax relief only up to the principal amount of the original mortgage.  This is a very important consideration and one that is often overlooked by many so-called short sale experts.

Not all States Recognize the Debt Relief Act

As previously stated, the most common tax exemption following a short sale is the qualified principal residence exception of the Mortgage Debt Relief Act. Some recourse states, however, such as Massachusetts, do not recognize the Mortgage Debt Relief Act. Homeowners, therefore, need to seek out other recognized tax exemptions, such as proving insolvency or filing for bankruptcy, in order to avoid being taxed on the debt forgiveness following a short sale. On the other hand, some short sale experts and tax professionals contend that short sales never result in tax liability, regardless of where you live or whether it is your primary residence, so long as your taxes are prepared properly. As a short sale facilitator, I don’t even attempt to speculate on the tax consequences of a specific short sale transaction. I always make certain that the seller is represented by an experienced attorney as well as encourage them to seek the advice of a licensed tax professional. In general, I always assume that a short sale will result in tax liability unless the homeowner qualifies for one of the recognized tax exemptions. Regardless, even if you think you qualify for a tax exemption, all homeowners should consult with a licensed attorney and a tax professional prior to agreeing to a short sale.

The Debt Relief Act and Short Sales in 2013

Even though many sellers don’t qualify for the tax relief, the extension of the Mortgage Debt Relief Act is absolutely necessary for the housing industry to recover in 2013. By extending the Debt Relief Act, the government is sending a message to lenders, distressed homeowners, and real estate professionals that short sales are the preferred method to assist homeowners in getting rid of a mortgage they can no longer afford. The tax exemption, along with lender incentives, encourage homeowners to be proactive about avoiding foreclosure. Fewer foreclosures will help stabilize home prices and less homeowners in default will mean a decrease in the shadow inventory.  Admittedly, not all professionals agree as to whether a short sale results in tax liability, and the waters can become rather murky the more you navigate through state-specific laws, recourse jurisdictions and the sale of investment properties or non-purchase money mortgages. If nothing else, however, the extension of the Debt Relief Act will enable homeowners to sell their primary residence at a loss without incurring thousands of dollars in tax liability while at the same time allow lenders to get rid of their non-performing loans.

Related Posts:

The Mortgage Forgiveness Debt Relief Act of 2007

Short Sale Tax Consequences: Understanding Qualified Principal Residence Indebtedness

How Does A Short Sale Affect Your Credit Score

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo at 617-264-0376 to schedule a free short sale consultation. 

TAX DISCLAIMER: None of the information on the site shall be construed or interpreted as tax advice and is strictly for informational purposes.  Readers shall not act upon this information without first seeking advice from an independent tax professional. To ensure compliance with IRS Circular 230, any U.S. federal tax information provided on this site is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein. All readers are encouraged to seek the advice of an independent tax professional when considering a short sale.

As tax season approaches, and more importantly, the expiration of the Mortgage Debt Relief Act of 2007, it is important to review the tax consequences following a short sale.  In general, the IRS will treat any canceled debt, such as forgiveness of a mortgage loan, as taxable income. Thus, if you live in a recourse state, such as Massachusetts, the only way to avoid tax consequences following a short sale is to qualify for a tax exemption. The most common exemptions are insolvency and bankruptcy. To prove insolvency, your total debts have to be greater than the total fair market value of your assets. A lesser known exemption, and one that is due to expire at the end of 2012, is the Mortgage Debt Relief Act of 2007. According to the Debt Relief Act, a homeowner may exclude the forgiven debt as taxable income if you can prove to the IRS that the indebtedness was incurred on your “qualified principal residence.” Most homeowners qualify for tax relief under the Debt Relief Act. Keep in mind, however, that not all states recognize the Debt Relief Act and you should always check with a qualified tax professional prior to agreeing to a short sale. The following paragraphs will explain why the IRS considers forgiven debt as taxable income and how to qualify for a tax exemption following a short sale.

The IRS Treats Forgiven Debt As Taxable Income

According to current tax laws, if you owe a debt to a third party and they cancel or forgive that debt, the IRS considers the canceled debt as “taxable income.” In the case of a mortgage loan, if you don’t repay your debt, you will be taxed on the amount of the money you failed to repay the lender, commonly referred to as the loan deficiency. In other words, if default on your loan, and the lender waives their right to seek repayment, the unpaid loan proceeds are converted into taxable income because you no longer have the obligation to repay the lender.  Thus, following a short sale in which the lien holder relinquishes their right to collect the deficiency amount, they are obligated to report any forgiven debt to the IRS on a Cancellation of Debt form 1099-C. Individuals are similarly required to report the forgiven debt to the IRS on Tax Form 982 and attach the form to your tax return.

Exceptions To The Rule

As mentioned above, the only way to exclude forgiven debt from taxable income is to qualify for a tax exemption. Unless you can prove insolvency or file for bankruptcy, the tax implications of a short sale will primarily depend on whether the property being sold is your primary residence and, if so, whether you qualify for a tax exemption. The most common scenarios when cancellation of debt is not taxable income involve the following:

• Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007; The Act applies only to forgiven or canceled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.  The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately. The Debt Relief Act expires at the end of 2012.
• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income;
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets;
• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income; and
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.  However, it may result in other tax consequences. It is important to determine whether your jurisdiction is considered recourse or non-recourse.

Qualified Principal Residence Indebtedness

The  Mortgage Forgiveness Debt Relief Act of 2007 is the most common exception to the rule that canceled debt is taxable income.  According to the Debt Relief Act, taxpayers may exclude debt forgiven on their “qualified principal residence” if the balance of their loan is $2 million or less. Qualified principal residence indebtedness is limited to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. Thus, even debt incurred as a result of a refinance loan will qualify for this exclusion, but only to the extent that the principal balance of the old mortgage would have qualified.  In other words, if the debt forgiven was a result of a short sale of your qualified principle residence, and you never refinanced, you will qualify for the tax relief.  If, however, you took out a refinance loan on your principal residence, you will qualify for tax relief only up to the principal amount of the original mortgage.  This is a very important consideration and one that is overlooked by many so- called experts. Debt forgiveness on second homes, rental property, business property, credit cards or car loans does not qualify for the tax-relief provision of the Debt Relief Act.  The Debt Relief Act of 2007 is set to expire at the end of 2012. Keep in mind, however, that not all states recognize the debt relief act and you should always check with a qualified tax professional prior to agreeing to a short sale.

Recourse Versus Non-Recourse States

Given the recent popularity of short sales, it bears mentioning that some states, such as California and Arizona, are non-recourse states, meaning that forgiveness of debt in non-recourse states generally does not result in taxable income. The lender’s sole recourse would be possession of the home, not repayment of the loan. This is not the case in Massachusetts. Massachusetts is a recourse state, meaning that lenders have the right to seek a deficiency judgment against a homeowner who defaults on a loan obligation. Thus, the lender will decide to either pursue the deficiency judgment against the homeowner or they will agree to cancel the remaining debt. If they choose to cancel the debt, the former homeowner will suffer tax consequences as a result of a short sale unless they provide the IRS with proof that they qualify for one of the aforementioned tax exemptions. Massachusetts does not recognize the Mortgage Debt Relief Act, therefore, in order to qualify for a tax exemption following a short sale you will likely have to prove insolvency or file for bankruptcy. For this reason, you should always consult with a licensed attorney and/or tax professional regarding your specific situation in order to determine whether a short sale will result in tax liability or legal consequences.

Tax Consequences Following a Short Sale

In summary, the general rule states that a homeowner will suffer tax consequences following a short sale because the IRS treats the forgiven debt as taxable income. The only way to avoid tax liability following a short sale is to qualify for the principal residence exemption, prove insolvency or file for bankruptcy. Regardless, the important thing to remember is that all of the exemptions require the homeowner to take affirmative action on their subsequent tax returns. Your lender is required to issue a 1099-C Form following a short sale.  It is your responsibility, however, to prove to the IRS that you qualify for a tax exemption by filing Tax Form 982 . Tax liability is not negotiable, you either qualify or you don’t. You should never, under any circumstances, take a lender’s word that a short sale will not result in tax consequences. In fact, if the lender is agreeing to waive their deficiency rights, they are required to issue 1099-C stating that they canceled your debt. The IRS, in turn, will treat that canceled debt as income unless you prove to them that you qualify for an exception. Massachusetts does not recognize the Mortgage Debt Relief Act, therefore, in order to qualify for a tax exemption following a short sale you will likely have to prove insolvency or file for bankruptcy. For this reason, you should always consult with a licensed attorney and/or tax professional regarding your specific situation in order to determine whether a short sale will result in tax liability or legal consequences.

For more tax information regarding cancellation of debt, including detailed examples, please see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

Related Posts:

Short Sale Tax Consequences: Understanding Qualified Principal Residence Indebtedness

How Does A Short Sale Affect Your Credit Score

The Mortgage Forgiveness Debt Relief Act 2007

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo at 617-264-0376 to schedule a free short sale consultation.

TAX DISCLAIMER: None of the information on the site shall be construed or interpreted as tax advice and is strictly for informational purposes.  Readers shall not act upon this information without first seeking advice from an independent tax professional. To ensure compliance with IRS Circular 230, any U.S. federal tax information provided on this site is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein. All readers are encouraged to seek the advice of an independent tax professional when considering a short sale.

Getting a Massachusetts short sale approved is no easy task. Buyers can, and do, walk away if they feel the transaction is taking too long. Mortgage insurance companies frequently demand unreasonably high contributions from the seller, thus killing the deal. Servicing rights can be transferred to a new lender mid- transaction. The foreclosure auction occurs despite the lender repeatedly telling you that it was postponed. These are only a few examples of what can go wrong.

Admittedly, many of the aforementioned reasons are unforeseen and cannot be prevented. The majority of short sales that fail, however, do so because the person handling the transaction makes a mistake and the buyer walks away prior to obtaining short sale approval. While it is imperative that the person handling the short sale negotiation takes certain steps to ensure a successful short sale, the buyer’s agent plays an equally important role in the approval process.

With a traditional sale, the buyer and seller negotiate against each other, whereas the agents in a short sale must work together to keep the transaction from falling apart. As someone with an extremely high short sale success rate,  I encourage buyer’s agents to take the following steps in order to ensure a successful short sale transaction.

1. Ask The Listing Agent Important Questions

 The buyer’s agent should always inquire as to specific transaction details prior to submitting an offer. You should always begin by asking the listing agent if they will personally be handling the short sale negotiation with the lender. If they use a third-party negotiator, then you will need to speak with that individual in order to determine their experience level. The first thing you need to ascertain from the individual handling the negotiations is the amount of liens encumbering the property. If the homeowner has two loans, then you will need to obtain short sale approval from both lien holders. As you can imagine, this fact, as well as the lenders’ identity, will largely dictate how long the short sale transaction should take.

Keep in mind, you should also confirm that all taxes are current and, if it is a condominium, whether all condo fees are paid because any delinquencies will result in additional liens that must be released prior to a deed transfer. Once you determine the total amount of liens, you should also ask whether the seller is already in default and, if so, whether a foreclosure auction date is scheduled. The last thing you want to do is spend a couple of months committed to a short sale only to find out that a foreclosure date is imminent.

Finally, it is always a good idea to ask the seller why they are seeking a short sale. Although the seller does not need to provide specific details, the buyer does have a right to know whether the seller has a lender approved hardship and, therefore, whether they even qualify for a short sale. If the listing agent or third-party negotiator cannot answer these basic questions, it is highly unlikely that they have enough short sale experience to get your short sale closed.

2. Manage Your Buyer’s Expectations

Once you determine that the seller is a qualified short sale candidate, you should next turn your attention your client, the buyer. You should immediately provide the buyer with a reasonable short sale time-line. By doing this, you not only show the buyer that you have done your homework, but you also ensure that all parties are on the same page from the outset of the transaction. On the most basic level, all short sales consist of three stages: (1) offer (2) valuation and (3) negotiation. Thus, if you provide a reasonable estimate of how long each stage will take, it is much more likely that your buyer will remain a party to the transaction, even if an unexpected event occurs, such as the loan being transferred to a new servicer or the lender grossly overvaluing the property. Both of which, by the way, have happened to me. If, however, the buyer enters the transaction with the expectation that the short sale will be approved in one month, the lender never has a reasonable opportunity to complete the short sale approval process.

In my opinion, an offer that expires in thirty days is not a strong offer and most likely not the “highest and best” offer because it never has a fighting chance to close. Instead, the buyer and seller should mutually agree upon a time period in which they reasonably expect the short approval to be obtained. That way, all parties are on the same page from the outset of the transaction. The simple task of providing the buyer with a short sale time-line will not only manage the buyer’s expectations, but will also discourage casual purchasers from making an offer on a short sale property.

3. Eliminate All Contingencies In The Contract

Simply put, short sale lenders do not like contingencies. The only exception to this rule is the mortgage financing clause and, even in that case, the buyer will have to submit a pre-approval or proof of funds letter showing that they will be able to eliminate the financing contingency shortly after receiving short sale approval. Thus, if you represent a buyer who needs to sell their current home prior to purchasing another, your client should not be looking at short sales.

Another common contingency, and a source of contention, involves the property inspection. Most buyer’s agents insist upon conducting the inspection after the lender approves the short sale. Most listing agents, however, don’t like this because it gives the buyer the ability to walk away from the transaction at any time, without cause. An offer that enables the buyer to walk away at anytime, however, is likely not the “highest and best” offer because the buyer is not committing to purchase the property subject only to short sale approval. The post approval inspection gives the buyer another opportunity to back out of the purchase with little or no penalty.

The seller, on the other hand, is unequivocally making a commitment to the buyer because they effectively take the property off of the market once they submit the signed offer to their lender. Admittedly, I understand why buyers may want to not want to spend a few hundred dollars up-front on an inspection, but you could easily make the argument that this decision potentially costs the buyer more money in the long run. Keep in mind, once you submit the offer to the lender, you forfeit your right to adjust the purchase price. If you are buying an “As Is” property, such as a short sale, wouldn’t you rather take into account all necessary property information prior to submitting your offer to to the bank?

In other words, wouldn’t it be in the buyer’s best interest to find out whether there are any major property condition issues prior to committing to the transaction for 60-90 days? More often than not, a short sale fails because the buyer walks away as a result of the property inspection, not because the seller was unable to obtain short sale approval. Regardless of your point of view, it is always best to deal with the inspection contingency issue at the outset of the short sale transaction so as to avoid any potential disagreements between the buyer and seller.

4. Make Sure Buyer Is Prepared To Close Upon Receipt Of Short Sale Approval

Most short sale approval letters are only valid for 30-45 days, and the majority of buyers make the mistake of waiting until receipt of the short sale approval letter before they initiate the financing process. In today’s market, it is virtually impossible for a buyer to obtain mortgage financing during this time frame. Moreover, simply obtaining a pre-approval letter from your buyer’s lender is insufficient. Anyone with an email address can obtain a pre-approval letter. As the buyer’s agent, you need to initiate contact with your buyer’s lender and confirm whether they will be able to close within 30-45 days of receiving the short sale approval letter.

I always ask the buyer’s lender for a list of conditions that need to be satisfied in order to receive a firm mortgage commitment. Next, I make certain that the buyer completes as many of these tasks as possible during the time in which I am working on getting the short sale approved. This way, the buyer simply needs to update their financial information and conduct the appraisal in order to finalize their financing.

While most short sale lenders will grant an extension, they are harder and harder to obtain, and in some cases the appraised value expires and the lender is required to re-submit the entire file to the investor for review. In my opinion, it is much more efficient, and doesn’t cost the buyer anything, if they eliminate all financing conditions during the short sale approval process rather than waiting until the short sale is approved.

5. Be Prepared to Negotiate and Engage The Use of a Professional

If you haven’t figured it out by now, short sales require the cooperation of all parties involved. Unlike a conventional sale, where the process is primarily adversarial, the buyer and the seller must work together during a short sale in order to get the deal approved. This includes the negotiation. Everybody knows that lenders prefer short sales to foreclosures, but they are not going to give the property away for less than what they deem as fair market value. By agreeing to the short sale, the lender is trying to mitigate their losses. As a result, the lender is going to attempt to cut their losses wherever possible. The most common method is to reduce real estate commissions or seller paid closing fees. Lenders also try to minimize their loss by demanding a cash contribution or promissory note at closing.

This is where it pays to engage the use of a short sale professional, even if you are the buyer’s agent. The short sale lender typically pays the negotiator’s fee, either directly or by way of a closing cost credit, so why wouldn’t you take advantage of the negotiator’s expertise? Furthermore, by encouraging your client to use an experienced short sale negotiator, you are showing the seller that you are committed to the purchase and taking the necessary steps to get the deal closed as efficiently and effectively as possible. The short sale negotiator should be able to leverage their expertise and get the lender to agree to the short sale with minimal financial damage to all parties.

A good negotiator is one that it is able to convince the lender that the proposed offer will result in less of a loss than a foreclosure, while at the same time getting the buyer their desired purchase price and, most important, getting the seller out of a bad situation with minimal credit damage an no deficiency balance owed following the short sale. All parties must be willing to negotiate and showing the lender that everyone is willing to make concessions will greatly increase the likelihood of getting your short sale closed.

Related Posts:

Five Tips For Listing Agents To Ensure Short Sale Approval

How To Keep Buyers A Party To A Massachusetts Short Sale Without A Signed Purchase Contract

Five Things To Avoid When Writing Your Short Sale Hardship Letter

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo at 617-264-0376 to schedule a free short sale consultation.

According to a recent report by California based RealtyTrac, distressed properties accounted for one third of all US housing sales in the second quarter of 2011. The glut of inventory is only going to increase as lenders slowly bounce back from the robosigning crisis and foreclosure filings begin to pick up around the country. A large portion of distressed sales are undoubtedly pre-foreclosure sales, or short sales. If you are a real estate professional, odds are that you worked on a short sale transaction in 2011. For those real estate agents who are yet to work on a short sale, you can no longer afford to ignore this segment of the housing market. If you are refusing to work on short sales, you are ignoring nearly 1/3 of your potential earnings. What makes these transactions so difficult is that every short sale is unique. The housing market is not getting better anytime soon, and short sales will likely account for a large portion of all housing sales in the next few years.  Below are five things a listing agent should do on all Massachusetts short sales in order to ensure a successful transaction.

1. Ask The Homeowner Specific Questions Prior To Accepting The Listing

Contrary to popular opinion, a homeowner does not automatically qualify for a short sale just because the amount they owe on their mortgage is greater than fair market value of their home. All short sale lenders require a financial hardship, yet very few listing agents ask the homeowner why they are requesting a short sale. As a listing agent, it is imperative that you first determine whether the homeowner qualifies for a short sale. Once you determine that your seller is a qualified short sale candidate, it is equally important to inquire as to the status of the foreclosure process. Most lenders no longer require homeowners to be delinquent on their mortgage in order to initiate a short sale, but the last thing you want to do is spend time working on the transaction if the foreclosure auction is imminent. A large percentage of all short sales that fail get denied because the seller is unable to postpone the foreclosure auction. Short sales are complex transactions that can be very frustrating for inexperienced real estate agents, but taking the initial steps of asking why the seller is pursuing a short sale, as well as making sure that a foreclosure auction isn’t scheduled, will greatly increase your chances of closing the deal.

2. Ascertain The Amount and Identity Of All Lien Holders

The listing agent should always ask the seller how many loans are on the property. You must obtain short sale approval from each lien holder. Thus, the more lien holders, the more complex the short sale transaction. Furthermore, the primary lien holders must agree, or at least approve, all payoff amounts to subsequent lien holders. Keep in mind that all lien holders need to approve the short sale, not just the lenders, so it is important to inquire as to any potential tax liens, unpaid condominium fees and any other debts the homeowner may have that could prevent you from obtaining short sale approval. It is equally important to identify the lenders from whom you will be requesting a short sale. All lenders have specific short sale procedures. Some lenders can process a short sale request in as little as 30 days, while others can take months to respond. Thus, by identifying the lien holder, a listing agent can take a lot of the guesswork out of a short sale transaction by simply ascertaining the identity and amount of lien holders.

3. Submit A Complete Short Sale Package

One of the biggest mistakes a listing agent can make is submitting an incomplete short sale package to the lender. Lenders receive hundreds of short sale requests every day. Upon submitting a complete package to the lender, the file is immediately assigned to a short sale negotiator. The sooner your file is with a negotiator, the faster he or she will schedule the lender’s appraisal. In contrast, if you submit an incomplete short sale package to the lender, your short sale is dead in the water. At that point, the only way to get someone to work on your file is to get a customer service representative to grant a review of the previously submitted documents. By the time that happens, most of the homeowner’s financial documents will have expired and you will be asked to re-submit those items. Most lenders can process a complete short sale package in the first 30-45 days, but the clock doesn’t start ticking until they receive a complete short sale package. If you make the mistake of submitting an incomplete short sale package, you make the short sale process infinitely harder than it needs to be.

4. Attend The Lender’s Appraisal

One of the most common short sale misconceptions is the belief that the lender calculates the potential loss as the total amount owed on the mortgage minus the short sale offer price. Instead, when you apply for a short sale, the lender is making the determination as to whether a short sale or foreclosure will result in a greater loss to the investor. In order to make this conclusion, the lender sends a representative, usually a local real estate agent, to come up with a fair market value of the property. Once the fair market value is assigned to the property, the lender uses this figure as the amount they expect to recoup if they sell the property at foreclosure. Consequently, if the short sale offer price is at least within the ballpark of the lender’s appraised value, the lender will approve the short sale because they can recoup the same amount of money without having to incur additional legal and carrying costs associated with a foreclosure.  In other words, the entire short sale transaction hinges on the result of an independent third-party property valuation conducted by a local real estate agent on behalf of the lender. As a result, the listing agent can greatly improve the likelihood of getting their short sale approved simply by attending the appraisal and presenting the lender’s representative with current market data and property condition issues that substantiate the current offer price.

5. Manage The Buyer’s Expectations

Aside from a foreclosure auction, the most common reason that a Massachusetts short sale fails is due to the buyer walking away from the transaction prior to obtaining short sale approval. While there are some steps the listing agent can take to prevent the buyer from walking away, the most effective method to keep a buyer a party to the transaction is through constant communication and managing the buyer’s expectations. As long as you are familiar with the lender’s short sale process and you submit a complete short sale package, you should be able to provide the buyer’s agent with an accurate estimate of how long the short sale approval should take at the outset of the transaction. This way, the buyer does not have unrealistic expectations and they are more likely to remain a party to the transaction, even when unforeseen events occur. As a short sale negotiator, there is nothing more frustrating than working on a file for 30-45 days only to have the buyer walk away days before obtaining short sale approval.

Related Posts:

Five Things To Avoid When Writing Your Short Sale Hardship Letter

How Does A Short Sale Affect Your Credit Score?

Short Sale Tax Consequences: Understanding The Qualified Principal Residence Exception

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

FTC Issues Stay On Enforcement Of Certain MARS Provisions

The Federal Trade Commission (FTC) recently issued a statement that it would no longer enforce several provisions of the widely scrutinized Mortgage Assistance Relief Services (MARS) Rule. The MARS Rule required all real estate agents working on short sales to make certain disclosures to homeowners as well as banned the collection of up-front fees. In a July 15 press release, the FTC conceded that the MARS disclosures were “confusing customers and inaccurate in some contexts.” The Commission issued an immediate stay on the enforcement of the MARS provisions to ensure the guidelines did not “inadvertently discourage real estate professionals from helping consumers with [short sale] transactions.” The stay applies only to real estate professionals who: 1) are licensed and in good standing under state licensing requirements; 2) comply with state laws governing the practices of real estate professionals; and 3) assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. The stay exempts real estate professionals who meet these requirements from the obligation to make disclosures and from the ban on collecting advance fees. These professionals, however, will remain subject to the Rule’s ban on misrepresentations.

History Of The MARS Rule

Enacted in December of 2010, the MARS Rule prohibited real estate professionals from making false or misleading claims and outlined several disclosures that had to be made by individuals offering foreclosure relief services, including short sales. The ban on advance fees went into effect in January, 2011. The rule applied to all individuals, as well as companies, who provided mortgage assistance relief services:

Section 322.2 DEFINITIONS (i) ‘‘Mortgage Assistance Relief Service’’ means any service, plan, or program, offered or provided to the consumer in exchange for consideration that is represented, expressly or by implication, to assist or attempt to assist the consumer with any of the following: and followed by subsection (6) Negotiating, obtaining or arranging:

(i) A short sale of a dwelling,
(ii) A deed-in-lieu of foreclosure, or
(iii) Any other disposition of a dwelling other than a sale to a third party who is not the dwelling loan holder.

While the authors of the MARS Rule specifically exempted attorneys from complying with the rule, they failed to provide a similar exemption for real estate agents. As a result, a number of real estate professionals immediately sought clarification as to whether they were considered a MARS provider and, therefore, subject to the rule.

Failure to Exempt Real Estate Professionals From MARS

As mentioned above, the FTC refused to explicitly exempt real estate agents from the MARS Rule because they felt real estate agents did not qualify as mortgage assistance relief service providers:

“The Commission concludes that an exemption for real estate agents is not necessary. Real estate agents customarily assist consumers in selling or buying homes and perform functions such as listing homes for sale, showing homes, and finding desirable homes for consumers. The Commission is aware that real estate agents may perform these functions when properties are bought or sold through a short sale transaction, but does not consider these services to be MARS.”

On the one hand, the FTC clearly intended for the rule apply to any real estate professional working on short sales. On the other, the failure to specifically exempt Realtors created widespread confusion among real estate agents as to whether they had to comply with the rule if they were obtaining, arranging or negotiating a short sale. The FTC’s reluctance to provide an exemption for Realtors, as they did for attorneys, essentially deferred interpretation of the MARS Rule to local and national real estate boards.

NAR Interpretation of MARS

The National Association of Realtors (NAR) broadly interpreted the MARS rule to conclude that “negotiating a short sale of a dwelling includes any communications with a lender about the possibility of a short sale transaction involving a consumer’s loan.” Consequently, “anyone who provides short sale negotiation services is considered a MARS provider and subject to the disclosure requirements”. Based on this interpretation, NAR expressly stated that “the MARS rule could have an impact on real estate professionals who represent short sale clients or market themselves as a MARS provider or a short sale specialist”. The NAR opinion strongly encouraged all individuals handling short sales, while working under their licensed capacity as a real estate professional, to comply with the MARS disclosure requirements. As a result, real estate agents throughout the country were required to update their advertising materials and consumer disclosures.

The Revised MARS Rule And The Realtor Exemption

Less than seven months after enactment of the rule, the FTC stated that “the stay on enforcement applies only to real estate professionals who are licensed, in good standing under state requirements and in compliance with all laws. Anyone who meets these requirements is now exempt from “the obligation to make disclosures and from the ban on collecting advance fees.” The Commission said that the stay does not apply to real estate professionals who provide other types of mortgage assistance relief, such as loan modifications. While the stay of enforcement provides some relief to real estate agents working on short sale transactions, in that they no longer have to issue short sale disclosures, the FTC made it clear that they will closely monitor this industry and continue to bring enforcement actions against all real estate professionals who engage in unfair or deceptive acts or practices.

FTC MARS Exemption: Is it Good Or Bad For Short Sale Agents?

As someone who exclusively negotiates Massachusetts short sales, I depend on local real estate agents for a large portion of my business. Since the inception of the MARS Rule last December, I found that very few real estate agents were aware of the rule, let alone compliant. Seeing as many agents didn’t issue the required MARS short sale disclosures, the exemption likely won’t have much of an affect on individual short sale transactions.  By exempting real estate agents from the advertising disclosures, however, the FTC may have opened the door for more inexperienced real estate professionals to market themselves as short sale specialists without having any short sale experience.

Many real estate agents who were aware of the MARS Rule were reluctant to enter the short sale market because the disclosure requirements were extremely prohibitive with regard to advertising and marketing materials. Granted, the MARS rule will still be enforced against any real estate professionals engaging in unfair or deceptive practices, but it won’t prohibit inexperienced agents from targeting distressed homeowners through mass marketing campaigns. One of the biggest problems in the short sale industry is the spread of misinformation, and by lowering the barrier of entry into the short sale market, the FTC MARS exemption may have the opposite result than that which the Commission intended.

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About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

When working with Massachusetts short sale candidates, the most daunting task always seems to be writing the hardship letter. All homeowners requesting a short sale are required to provide the lender with a hardship letter. The hardship letter is your best, and only, opportunity to explain to the lender why you are no longer able to afford your mortgage payments. Most real estate professionals make the mistake of viewing the hardship letter as a mere formality, or simply one more document amongst the many requested by the lender. That is a poor assumption and one that could prove costly at a later stage in the short sale process. It is no secret that banks are approving more short sales than ever before, but they are also rejecting short sales if they feel the homeowner’s hardship is insufficient. As someone with a high short sale success rate, I can honestly say that a well-crafted letter, written by the homeowner, can be the determinative factor in getting the lender to agree to a short sale. Even though I have been negotiating short sales for about five years and reviewed hundreds of hardship letters during that time, I am still unable pinpoint what exactly makes a great hardship letter, but I can tell you a few things to avoid when presenting your short sale hardship to the lender:

Don’t use a form letter or download one from the Internet

The loss mitigation department reads hundreds of hardship letters each and every day. You don’t need to be a great writer, but you should be able to tell the lender, in your own words, why you are requesting a short sale. The lender does not care about your grammar and they certainly don’t care whether your letter is typed or handwritten. The loss mitigation representative has one objective and that is to determine whether you qualify for a short sale. If you can’t take the time to write your own letter, they probably won’t take the time to read it.

Don’t try to explain your hardship

Every letter the short sale department reads attempts to explain the unfortunate circumstances surrounding the inability to make the mortgage payments. Instead of focusing on the effects of the financial hardship, an effective letter should state the actual hardship event, such as divorce or loss of job, and move on to the next paragraph. If you are writing a hardship letter, the reader already knows that you are having trouble making your payments. Your job is to tell them the reason why you are no longer able to make your mortgage payments, not to get them to feel bad for you.

Don’t blame others

Even if a loan officer from a bank convinced you to refinance and you used the equity in your property to pay off your student loans, this is not relevant to your request for a short sale. Instead of blaming others, take responsibility and stress the fact that some event, which was outside of your control, caused your financial situation to change such that you are no longer able to afford the mortgage payments. The financial documents you provide should support this assertion.

Don’t blame the poor economy or collapse of the real estate market

If the real estate market didn’t collapse, the person reading your letter wouldn’t have a job. There are other ways to tell the bank representative that your property is no longer worth what it once may have been. Instead of blaming the poor economy, it may be more effective to highlight the fact that the property has been on the market at full price for over a year and you only received one offer. Showing the bank that you at least attempted to sell at a higher price only substantiates the current short sale offer price. The bank will examine a multitude of factors, including how long the property has been on the market and whether you have lowered the asking price, in order to determine whether you qualify for a short sale.

Don’t write a novel

Some of the most effective hardship letters are no more than a few sentences long. Keep in mind, the person reading your letter most likely has hundreds of other files similar to yours. The sooner you can present the reader with your hardship reason, the more likely they are to approve your hardship request. Even if you have a great hardship reason, if you bury it on page three of you letter, the lender is less likely to read the pertinent portions of your  letter. In fact, some of the most effective letters are actually those which bullet-point the hardship reasons and simply refer to the financial documents as proof that you can can no longer afford the home.

Admittedly, there is no magic formula to writing an effective hardship letter, but if you can avoid some of the above-referenced examples and present the lender with a concise and informative letter,  you will greatly improve your chances of getting your short sale approved.  The hardship letter is one of the first documents the loss mitigation department reviews,  so if your letter fails to convince the lender that you are a qualified short sale candidate, it is highly unlikely that any additional information in your application will prove otherwise.

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About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

As someone who exclusively negotiates Massachusetts short sales, I receive about three to five new short sale referrals every week from local real estate agents or distressed homeowners. While it may come as a surprise, I actually reject quite a few of these short sale requests. The most common reason I refuse to submit a short sale package to the lender is due to an insufficient homeowner hardship. In order to qualify for a short sale, all lenders require a financial hardship. More specifically, most lenders require an involuntary hardship. An involuntary hardship is some event, beyond the homeowner’s control, that caused the mortgage payments to become unaffordable, even if only temporarily.

For example, a loss of job or curtailment of income is a lender approved hardship. It is important to note, however, that most lenders distinguish between someone who lost their job and someone who voluntarily quit their job. Even if you are able to prove to your lender that you are no longer able to make your mortgage payments, you still need to prove that your inability to make the payments was involuntary. Thus, unless you are able to prove that you were forced to leave your job, or asked by your employer to take a significant pay cut, a change of employment status may not automatically qualify you for a short sale. Furthermore, many homeowners have suffered multiple hardships, and it can be difficult deciding which hardship you should present to your lender when requesting a short sale. In all of my short sales, the most successful cases are those in which the homeowner is able to show that the hardship reason was involuntary and beyond their control. A good hardship letter will list all of the reasons, but the most effective letters focus on the involuntary hardship.

Due to the recent foreclosure problems in Massachusetts, lenders have bolstered their loss mitigation departments and are approving more short sales than ever before. Most lenders have a list of approved hardships which act as a benchmark for individuals contemplating a short sale. There are, however, many situations which may not automatically qualify as a lender approved hardship and need to be examined on a case by case basis.

As someone who only gets paid upon a successful completion of a short sale, I use my experience to analyze each homeowner’s situation, coupled with their specific lender’s hardship requirements, to determine whether their short sale request is likely to be approved. This way, I don’t waste my time, the lender’s time, and most importantly, the homeowner’s time if a short sale is not a viable option. The most common lender approved short sale hardships are the following:

• Loss of employment
• Curtailment of income
• Increased mortgage payments or increased monthly expenses
• Loss of tenant(s)
• Divorce or legal separation
• Catastrophic medical event or illness
• Job relocation
• Military service 
• Death in immediate family

Editor’s note: To every rule, there is always an exception. Some lenders may not be subject to investor restrictions or servicing agreements and merely want to get rid of a non-performing asset. As a result, these lenders do not require an involuntary hardship and merely require the financial inability to pay the mortgage. If you are in the Greater Boston Area and are considering a short sale, please contact us today at 617-264-0376 and we can quickly determine whether a short sale is right for you or your client.

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How Does A Short Sale Affect Your Credit Score

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About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

During this past week alone , I have received ten new short sale requests.  As a Massachusetts short sale negotiator, my services are generally not required until the buyer and seller execute an Offer to Purchase. Once the offer is signed,  the buyer’s agent inevitably calls me to request the seller attorney contact information so the parties can immediately execute the purchase and sale contract.  In each and every instance,  I inform the buyer’s agent that it is unnecessary to sign a Massachusetts purchase and sale contract until we have third-party short sale approval.  Given the increased volume of short sales, coupled with  the amount of “new” agents working on these transactions, it bears mentioning why, when the proper procedures are followed, it is not necessary to sign a purchase and sale contract until third-party approval is obtained.

With regard to short sale transactions, most of the attorneys and real estate agents with whom I work prefer to execute the purchase and sale contract after having received third-party approval. That way, the attorneys don’t spend time drafting and negotiating the contract if the sale never gets approved.  In order to get a firm commitment from the buyer, however, the offer usually contains an addendum requiring the buyer to remain a party to the transaction during the short sale approval period, which is typically 60 to 90 days. During the approval period, the seller agrees to refrain from accepting back-up offers.  Upon signing the offer, the buyer generally places a 1%  deposit,  or at least enough money to ensure the buyer will remain a party to the transaction. In consideration of the seller no longer accepting offers, if the buyer chooses to walk away during the initial short sale approval period, they lose their deposit.  If the approval period passes without third-party approval, the buyer has the right to extend. The addendum also states that, upon receipt of third- party approval, the parties have 5-7 days to execute a purchase and sale contract and collect the remaining balance of the 5% deposit. The purchase and sale contract  typically calls for the  closing to occur 30 days from receipt of written short sale approval.

While every short sale transaction is different, most lenders only require a signed offer to purchase in order to consider a short sale request. As a result, if you are able to eliminate the 7-10 days it typically takes to get a purchase and sale contract drafted and agreed upon, you are one week closer to receiving short sale approval. As a real estate agent, you can now focus your efforts on getting new listings and more signed offers. Keep in mind, I always require the buyer to conduct a property inspection, or waive their right to do so, prior to submitting the offer to the short sale lender. The reason being, if the offer is submitted subject to a property inspection, the short sale lender will not allow for a price change due to any property condition issues revealed by the home inspection. Thus, if a buyer objects to spending $300-400 dollars on an inspection prior to submitting the offer to the lender, they probably aren’t the right buyer for your short sale. I would rather find this out at the offer stage, instead of 60 days down the road after having spent many hours negotiating the short sale with the lender.

Contact us today if you are a real estate professional currently working on short sales and you need assistance keeping your buyers a party to the short sale transaction.

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About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

FTC MARS DISCLOSURES

Mortgage Assistance Relief Services Rule

The Federal Trade Commission (FTC) now requires all companies that offer mortgage assistance relief services (MARS) to make three types of disclosures to short sale consumers. The rule, which went into effect March 31, 2011, also bans the collection of up-front fees. While the advance fee ban was clearly intended to protect financially distressed homeowners from mortgage relief scams that sprang up during the mortgage crisis, real estate agents are now subject to the rule. Almost overnight, thousands of real estate professionals woke up to find themselves in violation of the MARS rule. The FTC’s unwillingness to explicitly provide a Realtor exemption, as they did for attorneys, immediately subjected real estate agents to fines up to $11,000 per day unless they were in compliance with the new rule.

The National Association of Realtors (NAR) confirmed that the rule affects any real estate professional “negotiating, obtaining or arranging a short sale of a dwelling.” In response to the ruling, NAR interpreted the rule as one that applies to all real estate agents who represent clients involved in short sale transactions. According to NAR, the rule also applies if you market yourself as short sale specialist or advertise short sale experience. So, whether you handle the actual negotiations or refer them to a third party, you are subject to the MARS rule and need provide your client’s with the proper disclosures.

MARS Required Disclosures

When applied to real estate agents, MARS requires anyone working on short sales to make three types of disclosures to consumers. Depending on the type of communication, the MARS Rule contains specific requirements as to how the disclosures must be presented to consumers. In all cases, the disclosure must be clear and prominent. For printed materials, such as advertising or marketing flyers, the written disclosure must be at least 12-point type, or one-half the size of the largest font used to list the name of the firm providing the disclosures, whichever is larger. Below are examples that could be used in written materials.

General Commercial Communications Disclosures

A real estate professional that advertises MARS, not directed at a specific consumer, will need to include in all advertisements a clear and prominent disclosure with the following:

IMPORTANT NOTICE (in two point-type larger than the font size of the disclosure): (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.

Consumer-Specific Commercial Communications

The second disclosure is required in all communications that the MARS provider directs to specific “prospective” clients. These communications must be provided by the MARS provider before the provider begins mortgage assistance services on behalf of the consumer. The time when the real estate professional needs to provide this disclosure will vary, as a listing broker may not be aware that the transaction will need to be a short sale until far into the listing process. A listing broker should provide this disclosure to the client in a letter or memorandum once (s)he is aware the transaction may be a short sale, highlighting this fact in the document and prominently displaying the below disclosure statement. The disclosure must provide the following:

IMPORTANT NOTICE (in two point-type larger than the font size of the disclosure): You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us (insert amount or method for calculating the amount) for our services. (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.

Disclosure When Providing an Offer of Mortgage Relief

The third disclosure needs to be provided in a clear and prominent manner at the time the real estate professional presents its client with the lender’s short sale approval letter. The disclosure must be provided on a separate page and state:

IMPORTANT NOTICE: Before agreeing to this service, consider the following information (in two point-type larger than the font size of the disclosure):This is an offer of mortgage assistance we obtained from your lender [or servicer].You may accept or reject the offer. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us [same amount as disclosed previously] for our services. If you stop paying your mortgage, you could lose your home and damage your credit rating.

The real estate professional must also provide the consumer with a notice from the lender or servicer that describing all material differences between the seller’s current loan and the lender’s proposal to modify the loan, or accept a short sale. This information will likely be contained in the lender’s short sale approval letter. If, however, the approval letter lacks this language, the MARS provider’s disclosure should include information regarding the lender’s ability to hold the seller liable for any deficiency amount and encourage them to seek the advice of independent counsel.

NAR on MARS

NAR unequivocally requires all Realtors working on short sales to provide their customers with clear and prominent disclosures. Depending on the type of communication, the disclosures should contain the language from the above-referenced examples. In addition, NAR expounded upon their interpretation to point out that rule not only affects how a real estate professional markets their services, but also applies to those referring a short sale client to an independent third party. A rule that was originally intended to ban the collection of up-front fees, something a Realtor rarely does, has indirectly affected the way real estate professionals interact with their clients when negotiating, obtaining or arranging the short sale of a dwelling.

If you are a Realtor handling short sales, I would love to read your comments regarding how you have amended your marketing materials in order to comply with the MARS Rule.

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About the Author: Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists homeowners, Realtors and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.