More homeowners who are underwater on their mortgages or face other hardships will have an easier time selling their homes for less than what they owe after new federal rules take effect later this fall. The Federal Housing Finance Agency recently approved measures that speed up short sales and will give more homeowners the option to enter the process. As a result, the housing market will likely experience a spike in short sales, which already account for about 9 percent of home sales, according to CoreLogic.
Starting Nov. 1, homeowners with either missed mortgage payments or other financial hardships (such as divorce, job loss, or death) will be allowed to apply for a short sale. Before, only homeowners with missed payments could be eligible. The short sale process already has been sped up thanks to other new guidelines put into place earlier this summer. Now mortgage lenders have only 30 days to respond to short sale offers. Before, the process could drag on for several months.
It is unclear just how many people will benefit from the new short sale rules. However, nearly nearly 5 million homeowners with loans backed by Fannie Mae or Freddie Mac are underwater on their mortgages, and 80% of those haven’t missed payments, according to the Wall Street Journal. CoreLogic estimates that there are around 11 million US homes that are worth less than the value of their mortgages.
Although this may benefit some distressed homeowners, there are a few drawbacks. Short sales can still hurt homeowners’ credit scores, even if they are current with their payments. Also, if an influx of short sales hits the market in a particular area or neighborhood, that could drive down home prices for regular homes, at least for the short term. Short sales are typically sold for 15% less than regularly-priced houses, according to the National Association of Realtors.
Banks such as Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup stand to record major losses on home equity debt if more short sales are approved. However, the losses on short sales could be less than if those same homes went through foreclosure. By avoiding drawn-out foreclosures and lengthy vacancy periods, the mortgage lenders will save time and money in the long run. Also, as part of the National Mortgage Settlement, lenders have agreed to provide $25 billion in cash and mortgage relief to homeowners and short sales are a part of that relief. The top five US mortgage lenders granted more than $10 billion in consumer assistance – more than 80 percent came from short sales – between March 1 and June 30, according to a report from the Office of Mortgage Settlement Oversight.
With the new rules in place, short sales are likely to outnumber foreclosures in troubled markets in California, Florida, Michigan, and Arizona. The clearance of distressed properties will help the housing market as it continues to recover. However, homeowners should consider all of their options before agreeing to a short sale, even if the process seems easier.