What is a Short Sale?
A short sale is when the outstanding mortgage (s) against a property is/are greater than what the property would sell for. Short sales are a way for homeowners to avoid foreclosure on their homes and still be able to pay off their loan by settling with lender.
This is the fastest-growing foreclosure alternative. Many lenders will allow a short sale, when the home sells for less than the amount of the loan. This is attractive for lenders because they lose less money than in a foreclosure. Also, a short sale takes less time to process, which helps the bank with their balance sheet.
One myth about short sales is that the impact to your credit is less than a foreclosure. This is true under certain conditions, but not always. It is important to understand that after a short sale, you may not be eligible for maximum financing for 3 years - 2 years if you have 20% down. You should discuss this with one of our REALTORS or preferably one of our loan officers.
Short sales are paperwork-intensive as there are many details and each deal is reviewed individually on its own merit. If you're considering this option, it's critical to work with a trained real estate agent who knows all the steps required to successfully complete a short sale or utilize the services of a short sale negotiator.
An experienced Merchants Realty agent can guide you through the process and act as a liaison between all the parties involved.
On April 5, 2010, U.S. Treasury announced guidelines for streamlining and simplifying the Short Sale Process through the HAMP program called HAFA (Home Affordable Foreclosure Alternatives). Ask your agent for details.
HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program. Servicers participating in HAMP are also required to comply with HAFA. A list of servicers participating in HAMP (including HAFA) is available at:
www.makinghomeaffordable.com/contact_servicer.html.
HAFA Provisions
- Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.
- Uses borrower financial and hardship information already collected in connection with consideration of a loan modification.
- Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
- Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
- Uses standard processes, documents, and timeframes/deadlines.
- Provides the following financial incentives:
- $3,000 for borrower relocation assistance;
- $1,500 for servicers to cover administrative and processing costs;
- Up to $2,000 for investors who allow a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders, on a one-for-three matching basis.
- Short Sale Negotiator Regulations
By
Arizona Department of Real Estate (“ADRE”) Commissioner Judy Lowe*
and
Arizona Association of REALTORS® (“AAR”) General Counsel K. Michelle Lind
Numerous regulations have recently been enacted governing short sale negotiations. In short, these regulations generally provide that a licensed real estate broker/salesperson representing a seller in a real estate transaction may negotiate a short sale with the lender provided that the broker/salesperson does not charge an additional fee for the service. The ADRE will begin enforcing these regulations on March 1, 2011. The following are answers to frequently asked questions regarding short sale negotiators.
Is a real estate broker/salesperson acting outside the scope of their real estate license by assisting a seller in negotiations with the lender to facilitate a short sale?
No. The scope of a real estate license encompasses assisting in the “negotiation of any transaction calculated or intended to result in the sale . . . of real estate.” A.R.S. § 32-2101(48)(j).
May a real estate broker/salesperson receive additional compensation for negotiating a short sale?
No. The Arizona Attorney General’s office (“AG”) has opined that a real estate licensee may not receive additional compensation from any source (seller, buyer, lender or otherwise) for negotiating a short sale, unless the real estate licensee is also licensed as a loan originator by the Arizona Department of Financial Institutions (“DFI”) and the requirements of A.R.S. § 32-2155(C) are met .1 The AG indicates that the general rule is that additional compensation requires an additional license. If a real estate broker/salesperson assists the seller in negotiating with the lender to accept the short sale price as a customer service and does not charge or expect additional compensation (including an increased commission), the real estate broker/salesperson does not need a separate loan originator license from the DFI.
Should a broker/salesperson negotiating a short sale with a lender on behalf of the seller comply with the Federal Trade Commission (“FTC”) Mortgage Assistance Relief Services (“MARS”) Rule (16 CFR Part 322)?
This issue remains unclear. A plain reading of the rule seems to sweep real estate professionals involved in short sale transactions under the MARS requirements, which include specific disclosures and a prohibition of up-front fees. However, a footnote in the FTC’s rule commentary seems to indicate otherwise. Members of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”) who dealt with the FTC on this matter before the rule was issued
1 A real estate broker/salesperson cannot collect compensation for negotiating loans unless: (1) they are licensed pursuant to title 6, chapter 9 as a mortgage broker, mortgage banker or loan originator; 2) they have disclosed to the person from whom the compensation is collected that they are receiving compensation for both the real estate and mortgage broker services and 3) the compensation does not violate any other state or federal law. A.R.S. § 32-2155(C).
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believe that the FTC did not intend the rule cover real estate brokers who are involved in a short sale transaction. However, NAR is not prepared to offer that advice to members based on the wording in the footnote because it only speaks of listing homes, showing homes and finding desirable homes for consumers. For information on MARS Rule compliance, if applicable, go to http://www.ftc.gov/os/fedreg/2010/december/R911003mars.pdf. NAR will issue additional guidance on MARS as soon as concrete guidance from the FTC is available.
May a real estate broker/salesperson without a loan originator license be compensated as a third-party short sale negotiator in a transaction?
No. A real estate licensee may not receive compensation for negotiating a short sale, unless the real estate licensee is also licensed as a loan originator by the DFI.
May a listing broker/salesperson charge the seller a non-refundable retainer fee in a short sale transaction?
Yes, provided that the non-refundable retainer fee is not for negotiating a short sale. The fee would be allowable if the listing broker/salesperson charges all sellers (traditional and short sale) a non-refundable retainer fee for listing and marketing the home to buyers.
Must a third-party short sale negotiator be licensed in Arizona to negotiate a short sale for compensation on behalf of an Arizona seller?
Yes, a loan originator license issued by the DFI is required to be compensated as a short sale negotiator.
If a salesperson receives any fee in connection with a short sale, regardless of the how the fee is described on the HUD-1, must the fee be paid through the employing broker?
Yes. A.R.S. §32-2155(A) requires that a salesperson “accept employment and compensation as a licensee only from the legally licensed broker to whom the licensee is licensed.” Compensation is defined as “any fee, commission, salary, money or other valuable consideration for services rendered or to be rendered as well as the promise of consideration whether contingent or not.” A.R.S. §32-2101(16). Thus, a salesperson may not receive compensation as a licensee from any person or through any entity, including a licensee’s LLC, other than the employing broker to which the salesperson is licensed
Are there any additional licensing restrictions that apply to FHA loans regulated by HUD?
Yes. Loan originators must be employed by a licensed mortgage broker who is responsible for the supervision of the loan originator. Under HUD rules a mortgage broker who handles FHA loans (“FHA mortgagee”) is prohibited from employing staff who are also employed in the real estate field. For further information about HUD's requirements, visit www.hud.gov.
What are the requirements to obtain a loan originator license?
Information on obtaining a loan originator license is available on the DFI website at: http://azdfi.gov/Licensing/NMLSLO/nmlslo.html
Do the Arizona foreclosure consultant statutes apply to a real estate broker/salesperson representing a seller in a short sale transaction?
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No, A.R.S. §44-1378, et. seq. does not apply to a real estate broker/salesperson while engaging in any activity for which the person is licensed. To review the foreclosure consultant statutes, go to www.azleg.state.az.us/ArizonaRevisedStatutes.asp?Title=44
Conclusion
There are a myriad of other issues relating to short sales. Before engaging in short sale activities make sure that you are on solid legal ground by consulting your broker, manager or independent legal counsel. For more information, visit:
AAR: www.aaronline.com/documents/LegalShortSales.aspx
ADRE: www.azre.gov
DFI: www.azdfi.gov/Licensing/NMLSLO/nmlslo.html
AG: www.azag.gov
FTC: www.ftc.gov/opa/2010/11/mars.shtm
Judy Lowe was appointed Commissioner for the Arizona Department of Real Estate by Governor Jan Brewer in May 2009 after a long and distinguished career in the real estate industry.
Arizona Association of REALTORS® General Counsel Michelle Lind is a State Bar of Arizona board certified real estate specialist and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.
*With the input and valuable assistance of the Arizona Attorney General’s Office.
This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.
