Can Short-Sale Rules Curb Foreclosures, Lift Prices?

After five years of sitting on the sidelines, Augie Byllott is ready to throw his hat in the ring and make some offers on short-sale properties.

He'd bought several before the housing bubble burst.

"But when the market changed, I stopped," said Byllott, a managing member of Homeowner Resource, a Champions Gate, Fla., real estate investment firm that buys mostly foreclosed properties. "The short-sale volumes grew so large the banks didn't have the infrastructure to handle them in a reasonable time frame, and you could go months and months with little or no response to an offer.

Byllott's ready to buy now because new short-sale guidelines took effect Nov. 1, to clear the weeds from the process of buying distressed homes that haven't yet been repossessed. If enough investors and other homebuyers make offers now, it could help lift home prices — as short-sale properties usually sell for more than bank-owned foreclosures.

Earlier Sales Are On Rise

Short sales are a phenomenon of the fallen U.S. residential real estate market, in which many homeowners owe more on a mortgage than their homes are worth.

In a short sale, the agreed purchase price is less than the seller's remaining mortgage balance. So the deal hinges on an OK by the lender, who's accepting a lower payoff on that existing loan in order to avoid a costly foreclosure.

Short sales accounted for 11% of U.S. home sales in September, according to data from the National Association of Realtors. That's close to the past few year-ago levels.

However, no-default short sales started rising even before the new government guidelines kicked in, says Daren Blomquist, vice president of foreclosure follower RealtyTrac. In these kinds of deals, the property has not yet started the long foreclosure process at the time the bank approves a short sale.

January to May, no-default short sales were up 13% from a year ago in all metro areas, Blomquist says.

Banks were trying to speed up processing even before the new guidelines arrived, in their own interest and amid complaints that short sales could take an arduous six to nine months contract to closing.

The Fannie Mae (FNMA) and Freddie Mac (FMCC) rules that took effect this month consolidate existing short-sale programs into a single standard one. They're designed to let lenders and servicers quickly and easily qualify eligible borrowers for a short sale, according to the Federal Housing Finance Agency, Fannie's and Freddie's regulator.

Generally, the new measures streamline documentation requirements, waive deficiencies for borrowers who successfully complete a short sale, and set standard payments for subordinate lien holders.

While it will take a few months to see how the new measures shake down, watchers say they should speed up the short-sale process, remove barriers to completing short sales, qualify more homeowners for short sales and make the process more efficient for homeowners and servicers overall.

"By streamlining the approach, they're moving short sales through expeditiously," Byllott said. "That means offers will be considered, accepted or rejected more expeditiously as well. That's what I find appealing from an investor's perspective.

Also, settlers "won't be sitting in limbo month after month," said Byllott, who sees making at least five offers a month on short-sale homes.

The new guidelines should help reduce the number of foreclosures, say real estate agents, lenders and analysts. Under the new rules, homeowners with a Fannie Mae or Freddie Mac mortgage will be permitted to sell their homes in a short sale even if they're current on their mortgage, if they have an eligible hardship such as death of a borrower or co-borrower, or a disability.

Blomquist says the guidelines are good for "underwater" borrowers struggling to make payments on homes worth less than their mortgage balance. More than 12 million U.S. properties fit that description at the end of September, he notes.

"This gives them an alternative, to do a short sale instead of going into a whole foreclosure process," he said. "In the past, to get approved for a short sale a homeowner had to stop making payments. Now, a homeowner doesn't have to jump through hoops to get approved. Rather, they have to show evidence to the bank they're in a hardship.

While no-default short sales were up in the first five months of 2012 vs. a year earlier, short sales of homes already in the foreclosure process were down 10%, Blomquist notes. He says the data suggest properties that would have ended up in foreclosure are being sold earlier — rather than starting foreclosure, the banks are approving the short sales "proactively.

"These new guidelines are solidifying this stance by giving servicers permission to approve short sales even if a homeowner is not in default," Blomquist said.

Lenders, Realtors Weigh In

GMAC Mortgage believes the guidelines "will benefit the customer as certain borrowers will qualify for reduced documentation, which in turn can speed up the short-sale process," said spokeswoman Susan Fitzpatrick, via email.

A benefit to Bank of America (BAC) is being able to help borrowers who are current but previously didn't have the short-sale option, says spokeswoman Jumana Bauwens.

The rules aid real estate agents by standardizing the documentation, adds Lisa Miclot, an agent at Long & Foster Real Estate in Gainesville, Va., who specializes in short sales.

"The expectations are also more understandable," she said, because agents can now get a handle on "what's going to be approved."