Another hurdle for short sale owners and negotiators
April 16, 2012
Nash Law Firm, PLLC
By: Stephen J. Nash
If you are involved in short sales you have probably already heard from servicer's, NAR and MAR that Freddie Mac recently changed their requirements to prohibit short sales during the period of redemption. NAR is working on getting this position reversed.
The following looks at the actual regulation and the change which is causing all of the fuss. Like many short sale hurdles, this appears to be another one that makes little sense since the change to the regulation does not prohibit short sales during the period of redemption!
Freddie Mac Guide, Section 65.56
The regulation in question is located in Freddie Mac Guide Section 66.56, Reporting Foreclosure Sale Results. Section (a)(1) requires that services report all sheriff sales to Freddie Mac. Section (a)(2) defines what Freddie Mac refers to as a “rollback” A roll back is defined as a Foreclosure sale that is legally invalid or void (e.g., a prior bankruptcy filing renders the sale void), or that the Servicer approved the Borrower for an alternative to foreclosure prior to the foreclosure sale, but did not cancel the foreclosure sale.
It is important to note that most states do not have a period of redemption after the sheriff sale. In fact, only 7 states in the country have a period of redemption following the sheriff’s sale. That does not mean that the foreclosure process is longer than in the states that do not have a period of redemption. For instance, the average foreclosure in Florida takes longer than the average foreclosure in Minnesota even though Florida has no redemption period that follows the sheriff’s sale.
Since the Freddie Mac regulation does not distinguish between states with or without a period of redemption following a sheriff’s sale, an alternative to foreclosure (i.e., a short sale) during the period of redemption could be considered a “rollback”.
The new regulation; however, did not change anything in the requirements of Section (a)(1).
Section b of the Freddie Mac Guide deals with the consequences to servicer who fails to properly report a “rollback”. The only change to Section b is found in subsection 2 which states the following: “The Servicer will be assessed a compensatory fee of $1,000 per occurrence when Freddie Mac must process an REO rollback in accordance with Section 66.56(a)(2).”
The Real Issue
So the change made did not prohibit short sales during the period of redemption but, instead, imposes a $1,000 fee for Freddie Mac to process the short sale. So it would appear that the real issue is not the servicers can no longer accept a short sale during the period of redemption but that the servicer’s have to pay a new $1,000.00 fee.
A simple solution would be to amend the definition of “rollbacks” to exclude foreclosures where home owners have the right to redeem after the sheriff sale.
Of course, nothing is easy when it comes to short sales. It is also worth noting that the change to the regulation is not effective until June 1, 2012, even though servicers are already refusing to approve short sales that would close before the effective date.
Hopefully, NAR will be successful in getting the regulation amended to resolve the issue. Until then, you can point out that the change did not prohibit short sale approval during the period of redemption and that even if it did, the effective date is not until June 1st. Remember, a servicer does not have to ever approve a short sale so don’t be surprised if they still say no.
The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract are, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation.
Copyright 2012 Nash Law Firm