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Reading Between the Lines of New Short Sale Rule

A new rule on short sales aims to help expedite and ease the process. But upon closer examination, it might not be as beneficial to borrowers as it appears at first glance.

A short sale is a home sales agreement in which lenders allow borrowers to sell their homes for less than the amount owed on the mortgage. Lenders prefer not to do this, and typically only agree to a short sale when the cost of doing so is less than the cost of foreclosing on a home. If you're trying to get lenders to approve a short sale, don't expect them to decide quickly since most are reluctant to approve these sales.

However, beginning April 5th, 2010, a new federal initiative called the Home Affordable Foreclosure Alternatives (HAFA) aims to make the short sale process easier and faster for all involved. But right now it's unclear whether this goal can be achieved.

The U.S. Treasury Department published the guidelines and one in particular, the guideline involving subordinate liens, could spell trouble for borrowers. If you have a home equity loan or line of credit and are considering a short sale, you need to pay close attention.
It seems the new HAFA guidelines want you, the borrower, to negotiate with your secondary lien holders to clear these liens up. But the problem is, secondary lien holders don't like to negotiate because it usually means they end up with nothing. Rather than have that happen, they try whatever they can to impede the short sale and cause more delays.

In an effort to incent subordinate lien holders to cooperate, the new HAFA guidelines offer them this deal: negotiate and the federal government will offer you three cents for every dollar owed by the borrower; one penny of which is paid by taxpayers. That hardly seems like a lot of money until you consider that in short sales, most subordinate lenders get zero cents on the dollar. So this can actually be a better deal.

In exchange for accepting the 3 percent incentive, HAFA guidelines attempt to get subordinate lien holders to agree not to take future legal action against the borrower to recover the 97 percent difference AND release their liens.

The problem is, it seems the responsibility for ensuring these agreements actually happen is the borrower's. The new HAFA guidelines are written in a way that attempts to persuade subordinate lien holders to cooperate in short sales by offering them some money. However, HAFA guidelines lack the enforcement power to make sure subordinate lien holders keep the promises they were supposed to make with borrowers in order to get money from the feds.

I thought I was mistaken, but here's what the Treasury Department is telling borrowers: "We require each subordinate lien holder to release you from personal liability for the loans in order for the sale to qualify for this program, but we do not take any responsibility for ensuring that the lien holders do not seek to enforce personal liability against you. Therefore, we recommend that you take steps to satisfy yourself that the subordinate lien holders release you from personal liability."

Makes me wonder, are average homeowners who are already underwater on their approved mortgages in any position to negotiate with subordinate lenders? Should they spend money they don't have hiring a lawyer to help negotiate? Seems to me the financial institution holding the primary lien is in a much better position to head up these negotiations.

Like usual, the intent behind the new short sale rulesis good. Offering monetary incentives to get secondary lien holders to stop delaying short sales can help the housing market by stopping foreclosures and helping troubled homeowners move into homes they can better afford and that support their lifestyles. But forcing the responsibility of ensuring secondary lien holders do what they're supposed to do in exchange for federal money seems a lot to ask of weary homeowners.

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