Transaction and Regulatory Committee Distressed Property Task Force Federal Committee
This material is for discussion purposes only and has not been approved by the Transaction and Regulatory Committee, Federal Committee, Executive Committeeor the Board of Directors.
Issue: Should C.A.R., in conjunction with NAR, “SPONSOR” legislation mandating subordinate lien holders approve a short sale offer if they will receive more money from the short sale than what they would net from a foreclosure?
Options: 1. “SUPPORT” policy mandating subordinate liens accept a short sale offer. 2. “OPPOSE” mandating subordinate liens accept a short sale offer. 3. Take another position 4. Take no action
Status/Summary Transaction and Regulatory Motion from Winter 2011 Meetings: Refer specific short sale settlement proposal regarding junior lien holder approvals to Distressed Property Task Force.
Subordinate Lien Acceptance: More than anything else REALTORS® are reporting subordinate lien holders as a major hurdle in the short sale transaction. Many of these subordinate liens are now worthless because of depreciated home values over the last few years. Nonetheless, they often hold out for additional cash above what senior lien holders are willing to pay, thus forcing cash contributions from buyers and sellers in order to close a deal. In some cases these cash payments are made outside of escrow and in direct violation of RESPA and antifraud laws.
The proposal that was put before the Transaction and Regulatory Committee at the Winter 2011 business meetings stated if a subordinate lien holder will receive more money in a short sale transaction than from a foreclosure then they would have to accept the short sale offer. .
Outlook: Congress will look at the issue of loan servicing during the 112th Session of Congress. To help spur discussion on various issues relating to loan servicing, the Obama administration included within its Reforming America’s Housing Finance Market Report to Congress that was released on February 11, a recommendation that states “mortgage documents should define the process for modifying a second lien in the event that the first lien becomes delinquent. This will prevent a second lien from standing in the way of a first lien modification and help prevent avoidable foreclosures.”
Additionally, the Federal Housing Finance Agency announced in January that they are instructing Fannie Mae, Freddie Mac and HUD to consider alternatives for future mortgage servicing structures and servicing compensation for their single-family mortgage loans. They are currently gathering information and feedback from the industry and may propose mortgage servicing changes utilizing the regulatory process later this year.
Washington is looking at mortgage servicing in light of the current difficulties the system is having. These difficulties include a lack of flexibility when servicing nonperforming loans, incentives that place parties at conflict, and lack of servicing consistency from loan to loan. Currently, loan servicing companies are generally paid a fee determined by the outstanding mortgage principal of the underlying mortgage backed security.
Support: Supporters of mandating subordinate liens accept short sale offers say: • These lien holders are holding onto worthless paper due to the loss of equity and are merely holding hostage the short sale transaction. • Subordinate lien holders can be slow and sometimes transfer the loan to loss mitigation during a short sale negotiation. When this happens, it becomes even more difficult to procure an approval by a subordinate lien holder. • When a lender is a subordinate lien holder they require more money to approve a short sale for a payout than they are willing to pay as the senior loan. This inconsistency is stalling the distressed property market and without mandates there will never be a fix. • Washington D.C. is looking at the issue of national loan servicing standards both at the legislative and the regulatory levels. This is a great opportunity to provide input into these decision making processes.
Opposition: Opponents of mandating subordinate liens accept short sale offers say: • Subordinate lien holders are private companies with contracts and requiring them to accept anything they don’t want to is simply not appropriate and encroaches upon the independence of another industry. • Subordinate lien holders have priced their loans to account for a certain loss. Forcing them to accept a greater loss may jeopardize their financial wellbeing and will likely increase future loan costs.
C.A.R. Policy: C.A.R. has no policy on requiring subordinate lien holders to accept short sale offers.
NAR Policy: NAR has no policy on requiring subordinate lien holders to accept short sale offers.
Should C.A.R., in conjunction with NAR, “SPONSOR” legislation mandating subordinate lien holders approve a short sale offer if they will receive more money from the short sale than what they would net from a foreclosure?