'Insider' Short Sales Can Keep Families in Their Homes, Senator Says

'Insider' Short Sales Can Keep Families in Their Homes, Senator SaysIs allowing “insider” short sales fair? Sen. Elizabeth Warren, of Massachusetts, believes it is more than fair to homeowners facing possible foreclosure and losing their homes because they owe much more than what their home is worth.
But the Federal Housing Finance Agency, regulator over Fannie Mae and Freddie Mac, does not allow what they see as a sweetheart deal for borrowers.
Warren, the junior Democrat who made a name for herself as a consumer advocate, posted a plea to Fannie Mae and Freddie Mac’s regulator on her website (FHFA’s Senseless Arm’s-Length Policy on Short Sales) to allow “friends, families, or nonprofit organizations” of underwater borrowers to conduct short sales for the purpose of renting the home to the family that lives there, or re-selling back to the family.

“In some of those short sales, friends, families, or nonprofit organizations are willing to buy the home at fair market value, then work out a rental or re-sale to the family living in it. The mortgage company gets the same amount as in a sale to strangers, but the homeowner has a last-chance to save the family home.
“This is a win-win for both sides-more money for the mortgage lender and a family that saves their home. But the FHFA flatly refuses these deals. The agency’s so-called “arm’s-length” policy means that it will instead demand that the family be moved out and the home be sold at a lower-priced foreclosure sale.”

The FHFA claims that its policy prevents “sweetheart insider deals” that benefit the homeowners at the expense of Fannie and Freddie, Warren added.
But that makes no sense when the house is sold at market value or “when people affiliated with the homeowner put in the highest bid to save the home.”
President Obama and consumer advocates have been trying to get Fannie Mae and Freddie Mac, the two U.S.-subsidized housing-finance giants, to initiate mortgage debt forgiveness for deeply underwater homeowners — but their regulator has refused.
That barrier may not stand in the way much longer if President Obama’s choice to replace Fannie and Freddie’s overseer is confirmed.
The President last month nominated House Financial Services Committee member Mel Watt, D-North Carolina, to replace Edward DeMarco as the director of the Federal Housing Finance Agency, the regulator of Fannie and Freddie, the entities that own or back about 60 percent of U.S. mortgages.
Mortgage debt write-downs, or partial principal forgiveness, is widely considered the best way to bolster economic recovery and ease the foreclosure crisis, once and for all, in this housing market recovery.

One thought on “'Insider' Short Sales Can Keep Families in Their Homes, Senator Says

  • June 14, 2013 at 5:00 pm

    FHFA has programs to help struggling borrowers to stay in their homes that significantly reduce mortgage payments, but don’t reduce the borrower’s mortgage amount. If the borrower is unable or unwilling to accept a loan modification that lowers his/her payment in order to help him/her stay in his/her home, an alternative for the borrower that wishes to sell his/her home is a short sale, where the borrowe’s first-lien mortgage balance in excess of the proceeds of the home sale is forgiven.
    Many borrowers somehow feel that it’d be a “better” deal for them if they could arrange a “short sale” but still stay in their home, in some cases by having “familiy members” or “non profits” buy the home at “fair value” — which is very difficult to determine in this volatile housing market. A serious issue with “non-arms-length” transactions, however, that is well documented, is that often “non-arms-length” transactions involve the “sale” of the home at well under “fair value.” That is, there is well documented evidence that non-arms-length transactions have a high incidence of fraud.
    If a homeowner truly wants to stay in his/her home, and is offered a loan modification that lowers his/her payment to a more affordable leve but doesn’t “like” the modification because that borrower is still in a negative equity position, then, well, that borrower may/should decide to move. If family members/non-profits want to help, they could (1) help with the mortgage payment; or (2) pay down the mortgage balance of the borrower (or (3) both).
    There are many programs to help borrowers with payment issues; they may not involve reductions in mortgage ballances — data indicate that such widespread programs would cost lenders, GSEs, and the FHA lots of money, and as such taxpayers lots of money. But the programs that lower payments enable families to stay in their homes if they want to, even though such programs don’t eliminate “paper losses” on their soured housing investment.
    Warren is so wrong on this issue. Thank goodness she wasn’t named head of the CFPB.

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