In an effort to speed up the short sale process and help homeowners avoid foreclosure, mortgage giant Fannie Mae has begun a three-month trial program that allows the company to pre-approve the “short sales” of homes, reports The Wall Street Journal (“Fannie Mae Tests ‘Short Sales’ as Alternative to Foreclosures,” Jan. 9, 2009).

Short sales — in which mortgage lenders agree to allow a home to sell for less than what is owed on it and sometimes forgive the difference — characteristically take a long time to complete. Buyers and sellers usually have a difficult time reaching a sales price that the mortgage holder will agree to prior to an expiration of the sale agreement. Fannie Mae is hoping to remedy these problems by determining an acceptable price for homes before a buyer has been located.

Pilot Program Targets Hardest-Hit Markets

Barely a week into the new program, which began in late December and will continue for three months, 400 homes in the two test markets Orlando, Fla., and Phoenix had already met the two major qualifications for the program — they were serviced by Countrywide Financial Corp. and their list price was less than the mortgage’s remaining balance.

Borrowers in Phoenix and Orlando have been hit exceptionally hard by foreclosures. Through October of last year, Phoenix area home prices dropped 33 percent, the worst decline in the country, according to Standard and Poor’s/Case-Shiller home-price index. As of August 2008, approximately 29 percent of Arizona’s borrowers had negative equity, and an additional 6 percent of borrowers were on the brink of negative equity, reports First American CoreLogic, data provider.

“Values have come down so far that everybody here’s upside-down,” said Ron Leis, a real-estate broker. “Until we can come up with approved sales, we’re stuck selling foreclosures.”

Short Sales May Help Stem Losses

Fannie Mae hopes that with so many foreclosures currently on the market and many more on their way, its pilot program will prove successful enough to be implemented nationwide and will help the company cut its losses from homes sold through foreclosure.

Lenders generally only lose about 19 percent on short sales, compared to a 40-percent loss if a home is sold after a lender forecloses on it, according to an analysis by Clayton Holdings Inc., which tracks mortgage loans for real estate investors.

Kevin Brungardt, Fannie Mae’s Vice President for Servicing Management, said
“Fannie Mae’s goal is to make the short-sale process as fast as possible for homeowners in financial distress,” he said.

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