Freddie Mac Short Sale Guidelines
For several years, loan modifications were the workout of choice for delinquent Freddie Mac borrowers. As of 2011, the combination of decreased property values and tough economic conditions caused short sale numbers to rise, according to the National Association of Realtors. Short sales help keep bank-owned real estate inventory down and preserve neighborhoods. Lenders must follow specific guidelines to obtain short sale approval for a Freddie Mac mortgage.
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The Basics
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A short sale involves the short payoff of a mortgage through a lender-approved sale of the home. It is a way for struggling homeowners to avoid foreclosure or surrendering ownership to the lender.
Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise (GSE) that buys and sells residential mortgages. Along with Frannie Mae, its sister GSE, it provides most of the housing market's liquidity. Freddie Mac loan services can be found at banks and mortgage lending institutions, which work with the borrower and GSE during a short sale transaction.
Freddie Mac HAFA
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Freddie Mac participates in the government's Home Affordable Foreclosure Alternatives (HAFA) program. In 2010, the GSE implemented its version, helping to streamline and facilitate the short sale process.
HAFA provisions prohibit lenders from pursuing borrowers for deficiency judgments after the short sale. It also provides monetary incentives for the borrower, primary lender and any junior lien holders to encourage cooperation in the transaction. Borrowers must undergo a review for loan modification before obtaining a HAFA short sale approval. The program expires at the end of 2012.
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HAFA Guidelines
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Lenders must meet the GSE's HAFA guidelines as outlined in Chapter B65 of Freddie Mac's Single-Family Seller/Servicer Guide. To qualify, the first lien mortgage must have originated before 2009. The loan must be at least 60 days delinquent and the borrower may not have more than $5,000 in cash reserves. The borrower must occupy the home as their primary residence during the short sale. Investment, vacant, condemned or abandoned properties are ineligible for HAFA.
Short Sale Fraud
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Freddie Mac issued an industry warning in 2011 about rising short sale fraud. An example of fraud involves a real estate professional conspiring with another party to purchase a short sale at a low price while preventing or hiding better offers from the struggling homeowner and lender.
The transaction often results in a flip; that is, the subsequent sale of the home comes at a profit to the conspirators. Effects of short sale fraud include higher losses for homeowners, Freddie Mac and taxpayers. Freddie Mac requires all parties in a short sale to sign an arm's length affidavit.
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