January 2011
Transaction and Regulatory Committee
Federal Committee
This material is for discussion purposes only and has not been approved by the Transaction and Regulatory Committee, Federal Committee, Executive Committee or the Board of Directors.
Issue:
Should C.A.R., in conjunction with NAR, propose short sale legislation intended to improve and ease the short sale transaction? Including provisions that will:
- Require lenders to utilize mark-to-market accounting for any property with a notice of default filed.
- Require lenders to respond to a short sale offer within 10 business days or the offer is considered to be accepted. Should there be an allowance for language that allows the terms of the servicer/investors agreement to preempt this timeline?
- Create a safe-harbor for servicers to protect them from investor litigation.
- Require subordinate lien holders to accept any subordinate lien payoff if it is more than they would receive in a foreclosure utilizing the HAFA BPO.
- Increase the tax benefit for losses due to short sale transactions and eliminate the lenders’, servicers’ and investors’ ability to write off losses for foreclosures.
- Require that any payment on a note in connection with a short sale constitutes full satisfaction of the debt owed to that lender/investor.
- If a lender has disapproved a proposed short sale or loan modification, this proposal would prohibit the lender from reporting a subsequent default, deed-in-lieu or foreclosure as an adverse credit event unless the lender actually resells the property within one-year for more than the amount that was disapproved in the proposed short sale, or more than the principal offered in a proposed loan modification.
Action:
In light of continued difficulties members face in order to complete a short sale transaction, C.A.R. staff is requesting policy direction.
Options:
1. “SUPPORT” going to Congress and asking them to pass a short sale bill with all or some of the recommended provisions.
2. Take no action
3. Other
Background:
Mark-to-Market:
Mark-to-market is an accounting term that means assets on a company’s balance sheet are valued at what they can currently be sold for. This accounting was effectively suspended in early 2009 as a response to the financial crisis. As markets froze and assets became worthless, businesses asked for the elimination of mark-to-market accounting. Their argument was that having illiquid assets that will not be disposed of in the near future valued at their current sale price was not realistic and hurting their balance sheet.
Lenders argued that if they have a home on their books and the loan on that home was originated in say 2006 then that home is not likely to be sold in the near future, therefore they should not have to price the asset at its current market value; which is far below the original price. C.A.R. proposes not to change this, but to acknowledge that once a lender has filed an NOD, there is a strong likelihood the home will be disposed of through a short sale, deed-in-lieu or foreclosure and should therefore be valued at mark-to-market.
By not valuing an NOD at mark-to-market, it encourages lenders to maintain the property on their books at the inflated value and is a deterrent to a short sale or modification. Under current rules, once the asset is disposed, as in a short sale or REO sale, the true value of the property is then placed on the books and the loss recorded. Lenders can delay the realization of a loss by denying a short sale and delaying foreclosure even though the loan is not performing.
Require Lender Response:
There have been some attempts to mandate a quick response by lenders to short sale offers. The Home Affordable Foreclosure Alternative program (HAFA) requires a response within 10 business days; however, there is no penalty for missing this deadline. In the last session of Congress there was a NAR proposed bill that would have required a response within 45 days otherwise the offer would have been deemed accepted. In both instances, there is language that allows existing servicing contracts between the servicer and investor to preempt these timelines.
According to one large lender, the time they take to accept a short sale offer is 45 days if they have authority to make the decision on their own and 60-70 days if they have to go to the investor to get approval.
Servicer Safe Harbor:
Since the beginning of the housing crisis servicers have said they are bound by their servicing contracts with investor which tie their hands and limits their ability to quickly perform modifications and short sales. This proposes to create a safe-harbor for servicers to protect them from investor litigation for any breach of contracts related to a modification or short sale.
Require Subordinate Lien Holders to Accept Certain Short Sale Offers:
This proposal would require that if a subordinate lien holder will receive more cash in a short sale transaction than they would from a foreclosure then they would have to accept the short sale offer. The property valuation could be done by utilizing a HAFA approved broker-price-opinion (BPO). More than anything else our members are reporting to us that subordinate lien holders are holding short sale transactions hostage. 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.
Tax Incentives:
This would propose reducing or eliminating the tax benefit a lender, servicer, and investor could take from a foreclosure. It would equally increase the tax benefit for a lender, servicer, and investor for performing a modification, short sale or deed-in-lieu.
No Deficiencies for Short Sales:
Many lenders continue to include promissory notes or language reaffirming their ability to seek deficiencies as part of accepting a short sale offer. In response, homeowners are simply refusing to sign or agree to these terms which negate the possibility of a short sale and forces the homeowner to go to foreclosure. This proposes that any payment on a note in connection with a short sale constitutes full satisfaction of the debt owed to that lender/investor.
Credit Impact:
If a lender has disapproved a proposed short sale or loan modification, this proposal would prohibit the lender from reporting a subsequent default, deed-in-lieu or foreclosure as an adverse credit event unless the lender actually resells the property within one-year for more than the amount that was disapproved in the proposed short sale, or more than the principal offered in a proposed loan modification. The purpose of this is to protect consumers who were forced into default and foreclosure because the lender turned down a reasonable short sale or modification offer.
Status/Outlook:
Currently, all short sale proposals from the government are in a voluntary form and there has been no legislation passed. Ever since the market began its downturn three-years ago lenders have beaten back every attempt by D.C. to force them into modifications or alternatives to foreclosures. This has led to the current voluntary Making Home Affordable programs of HAMP and HAFA; programs that attempted a “carrot” approach with lenders and servicers. With Congress just starting their new session, now would be an opportune time to introduce such a bill.
Support:
Supporters of this proposal say:
• Lenders have had three-years to voluntarily fix the housing market and have failed. Foreclosures are on the rise, short sales are just as difficult as they have always been and nothing has substantially changed by letting the industry fix it themselves.
• Federal legislation is needed to force lenders and servicers to perform modifications and short sales in order to avoid foreclosure whenever possible.
• The proposed legislation includes financial incentives that would not harm lenders but would in fact reward them for performing modifications and short sales.
Opposition:
Opponents of the proposal say:
• This would force the servicers to break existing contracts with investors which would set a bad precedent.
• The current system is working and servicers have made huge strides.
• We are already three-years into the housing crisis. It is likely we will be through the current downturn in another three or four years. By the time any of this gets up and running short sales will no longer play a dominant role in the housing market and the legislation will be irrelevant.
• These mandates will force lenders to take into consideration the additional costs of doing loans and will pass those costs onto homebuyers in the form of higher interest rates and loan origination fees.
C.A.R. Policy:
C.A.R. has worked to ease the short sale transaction process but lacks sufficient policy direction to either ask NAR or go to Congress ourselves to introduce a bill with these provisions. Additionally, C.A.R. has opposed attempts to pass legislation that would force lenders to modify first mortgages on principal residences through bankruptcy courts.
NAR Policy:
Like C.A.R., NAR has also worked to ease the short sale transactions. NAR sponsored the bill last year that would place a 45 day response time on short sales; however, it is unknown if they have policy covering the other issues.
Should C.A.R., in conjunction with NAR, propose short sale legislation intended to improve and ease the short sale transaction?
