Short sales are becoming increasingly popular as a means to avoid foreclosure. Even the administration is encouraging both homeowners and servicers to pursue a short sale when loan modifications aren’t a viable optionby offering cash incentives for a short sale transaction under the Making Home Affordable program. But HUD doesn’t look as favorably on short sales for distressed homeowners.
HUD has issued a mortgagee letter to lenders and underwriters explaining that effective immediately, borrowers in default on their mortgage at the time of a short sale or pre-foreclosure sale will not be eligible for a new Federal Housing Administration (FHA) -insured mortgage for three years.
From the language of the letter, it seems HUD views a short sale by homeowners behind on their mortgage as a so-called “strategic default.” The agency says borrowers are not eligible for a new FHA mortgage if they pursued a
short sale agreement on their primary residence “simply to take advantage of declining market conditions and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.”
Lenders may make exceptions to this rule if the default was due to circumstances beyond the borrower’s control, such as the death of the primary wage earner or long term un-insured illness, and a review of the borrower’s credit report indicates satisfactory credit prior to such circumstances.
For a homeowner to be eligible for a new FHA-insured mortgage following a short sale, they must have been current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and the proceeds from the short sale must serve as payment in full, HUD said.
FHA will also insure the first mortgage where the existing note holder writes off the amount of indebtedness that cannot be refinanced into the new mortgage – a short payoff – due to a decline in property value or a reduction in income, but once again, only if the borrower is current on their loan payments.
HUD is hoping to deter homeowners from intentionally defaulting to get out from under their existing mortgage obligation with the new rule, but it also means that struggling borrowers who go along with the administration’s Home Affordable Foreclosure Alternatives Program (HAFA) to keep from adding to the foreclosure numbers will not be eligible for a new government-backed loan.
12/21/2009 By: Carrie Bay
