Short Sale Blog

What is the VA Compromise Sale Program?

The VA Compromise Sale Program is often referred to as the VA Short Sales program. Many homeowners who are looking to sell their homes today are finding that, in the current economic climate, the market value of their home is less than the amount owing on their mortgage. However, if their home loan was financed as a VA Loan, they may be eligible for assistance through the VA Short Sales Program.

VA Loan summary

The VA Loan is a program administered through the Department of Veterans Affairs, available to eligible service persons and veterans to help them to negotiate home loans at more favorable terms than most borrowers would have access to.  

VA does not provide the funds; the mortgage is still issued through a private bank, like any other mortgage. But VA provides a loan guaranty to the lender, promising to pay a specific amount to the lender in case they are unable to continue making payments on their loan. They do not guarantee the entire value of the loan, but a percentage. This can range from 50% on loans up to $45,000 (i.e. maximum $22,500), to between 25% and 50% of loans up to $144,000, and up to 25% of the Freddie Mac conforming loan limit on loans over $144,000.

The maximum amount that VA will guarantee a loan for is called the “entitlement.”  It is like an insurance policy for the bank. Active-duty service persons can qualify for entitlement. The amount of entitlement that a service person is eligible to receive can be found on their Certificate of Eligibility, available from VA.

The advantage of getting a home loan through the VA program is that borrowers receive much more favorable mortgage terms. Since the bank receives the loan guaranty from VA, borrowers can negotiate a loan with little or no money down - even a deposit of 0% - and receive lower interest rates.

Why would a homeowner choose to proceed with a VA Short Sale?

Sometimes, circumstances force the sale of a home at a lower sale price than the original purchase price. For members of the military, reasons to sell a home at a loss might be because of a permanent change of station, or a change in marital status.

If the home was purchased with a VA Home Loan, the seller might be eligible for the VA Compromise Sale Program. If an offer to purchase is received that is less than the amount owing on the home loan, the homeowner can send a request to VA to undertake a “compromise sale” (or short sale). If VA approves the sale, they will pay the lender the difference between the purchase price and the amount owing on the VA mortgage, up to the amount that they guaranteed on the original home loan.

In a regular short sale, the homeowner is dependent upon the lender agreeing to take a financial loss - absorbing the difference between the amount owing on the mortgage and the sale price of the house - in order for the homeowner to rid themselves of a mortgage that they no longer can service. If the lender does not approve the short sale, it cannot go ahead. The advantage of a VA Compromise Sale or Short Sale is that VA takes some or all of the loss, through their loan guaranty, making it much more likely that the lender will approve the short sale.

Eligibility requirements:

The VA Compromise Sale program is for homeowners who have already received a purchase offer on their home that falls short of the amount owing on their mortgage, and whose mortgage was negotiated through the VA Home Loan program.

In order to qualify for the program:
- the seller must demonstrate financial hardship
- the home must be sold at fair market value based upon current market conditions
- there must be no second lien or other lien on the home, unless the value of that lien is deemed by VA to be “insignificant” (In situations whereby there are second liens or other liens, the seller can request that the lien-holder consider releasing the lien and converting the loan to a personal loan.)
- closing costs for the sale must be considered “typical” for such a sale
- the compromise sale must be less costly to the government than foreclosure would be
- the borrower must provide a statement explaining why they must sell the property
- a VA appraisal will be required
- on loans that originated on or before December 31, 1989, the seller must be willing to sign a promissory note and enter into a payment plan to compensate VA for a portion of the compromise claim payment.

To protect the seller’s interest, the seller should make the sales contract subject to the approval of a VA compromise sale.

Steps:

The homeowner must first receive a purchase offer, at current fair market value, that is lower than the amount owing on the mortgage. Once this offer has been received:

1. Find out if your lender has a Loss Mitigation Department that has been authorized by VA to process a VA compromise sale. You can find an up-to-date list of authorized lenders here or you can contact your lender to ask them.

2. If your lender does have a VA-authorized Loss Mitigation Department, contact them directly for the forms. If they do not, then contact your regional VA office for forms.

3. Fill out a financial status report form, provided by your lender or the VA. You can download the form here.

4. Complete a letter of request.

5. Complete a Compromise Agreement Sale Application form, provided by your lender or the VA.

VA will then work with your lender and review the application. If they approve the short sale, VA will pay the lender the difference between the mortgage balance and the proceeds of the sale - up to the value that the VA Loan was guaranteed for.

When VA pays the lender the difference between the sales price and the total debt, the portion of the homeowner’s entitlement used to guarantee the loan will remain tied up until VA is reimbursed in full.

Further information:

Updated list of VA-authorized lenders:
http://www.vba.va.gov/ro/roanoke/rlc/slmps.htm
If your lender is not on this list, VA will process the Compromise Sale/Short Sale directly.

Regional loan centers contact information:
http://www.benefits.va.gov/homeloans/rlcweb.asp

More information (pdf document):
www.vba.va.gov/ro/roanoke/rlc/forms/Compromise Sale Program.pdf

VA Compromise Sale Program - Info for Real Estate Professionals:
http://www.vba.va.gov/ro/houston/lgy/compsale.html

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Freddie Mac CEO, Ed Haldeman released a statement today on "Why Foreclosure Prevention is a National Priority." He states that while the overwhelming majority of borrowers are current on their mortgages, that since the start of the recession that over three million homeowners have lost their homes to foreclosure, and that over five million are still currently at risk.

While Freddie Mac would like to find ways to help homeowners stay in their homes, they recognize that in many cases it is not financially feasible to make that happen. The typical reasons why a homeowner doesn't qualify for a workout plan is when they are struggling with a job loss, curtailment of income, a health issue, or simply bought more house than they can afford.

In those situations, Freddie Mac has found that the best scenario for the homeowner is to find a graceful exit from homeownership. Solutions such as short sales are recommended by Freddie Mac as they help homeowners avoid the stigma of foreclosure, shorten the waiting period before they can buy another home, and may inflict less damage on the individual's credit report. Freddie Mac reports that short sales are up by 600% from 2008.

Fannie Mae, in an effort to reduce the amount of 'strategic defaults' has issued new underwriting guidelines meant to punish those homeowners who walk away from a mortgage, even when they have the ability to pay it.

Researchers have stated that the main motivation to walk away from a mortgage is when there is negative equity. According to real estate research firm CoreLogic, about 11.3 million homeowners are underwater on their mortgages. Around 2.3 million additional homeowners are very close to being underwater. All told, almost one-third of all U.S. homeowners are either underwater or are close to it. CoreLogic projects that the typical underwater homeowner will not return to a position of positive equity until 2015 or 2016 at the earliest.

Fannie Mae is targeting homeowners who let their house go to foreclosure without evidence of a hardship or a good-faith attempt at a workout alternative. The penalty that Fannie Mae is implementing is two-fold. First, they have declared that strategic defaulters will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Secondly, they are vowing to aggressively pursue deficiencies in states that allow them to do so.

In order to encourage workouts, Fannie Mae, in April 2010, issued a revised underwriting bulletin, found here, that encourages homeowners to seek foreclosure alternatives such as short sales, by making the homeowner eligible for a new Fannie Mae backed loan in as little as two years. Compared to the waiting period of seven years post-foreclosure, it is clearly an advantage to pursue alternatives to foreclosure.

Let's take an example of a borrower who is underwater. Here at Seattle Short Sales, Inc. we work with hundreds of local homeowners, and can draw on a mountain of recent statistics. You can see all of the short sale approval letters here. On average, when the home is sold, the debt discounted is over $100,000 on an average property.

In our example, the homeowner previously purchased the property for $350,000 four years ago. The homeowner has a mortgage payment that is over $1,000 more than a rental payment would be for a suitable, alternative dwelling. If it takes until 2016 to regain their lost equity, that would mean they are making 84 housing payments for a $1,000 more than necessary, with nothing to show for it in the end. $84,000 put into the pocket of a homeowner in only six years is the reason why people voluntarily default.

Now, in Washington State, if the house goes to a Trustee Sale, the foreclosing senior lien holder, in most cases will not have a right to pursue the borrower for a deficiency. The junior non-foreclosing lien holder does retain the right. So, if the homeowner only has one mortgage, then there is a good chance that they could completely walk away unscathed, except for the restriction in using Fannie Mae money for the next seven years. If they have a junior lien, then the situation is more complicated.

In all cases, the homeowner will want to consult with a real estate and bankruptcy attorney to assess their options and compare the pros and cons of the situation.

Responding to concerns that homeowners are not finding relief through loan modification efforts, the federal government is rolling out a new short sale incentive program on April 5th.

At the heart of the program are incentives and cash payments, directed at the loan servicers, junior lien holders, and homeowners. The loan servicer will now receive $1,000 for a short sale, up to $3,000 is available to the junior lien holder, and $1,500 is available for homeowners, for 'relocation assistance.'

The program is not without challenges and potential large problems that will hold is back from being truly effective.

First, the program is voluntary. While loan servicers might be more open to processing short sales, due to the financial incentive, the final approval for a short sale transaction is still made by the investor who owns the loan.

Second, the junior lien holders can kill a deal if they want more money than the $3,000 that is allocated to them. At Seattle Short Sales, we find that here in the Seattle area, many homeowners have HELOCs and seconds with balances of $75,000-$100,000. Typically, those lenders are asking for 10% or more of the principal balance, in order to release the lien. So, in many cases we may see a situation where the lien holder wants $4,000-$15,000 more than they are being allowed by the foreclosing first lien holder.

Third, in the federal short sale program, the junior lien holder is instructed to release the borrower from any deficiency balance. I don't see that happening in any great scale. If a lender is holding a $100,000 HELOC note, it is highly doubtful that three thousand dollars will compel them to give up the rights to collect $97,000. In Washington state, in a trustee sale, only the foreclosing senior lien holder loses their deficiency rights. The junior lien holder retains their deficiency rights. And, we have found, in the short sale approval letters granted by junior lien holders, they typically retain their deficiency rights.

So, there is some good news to the new federal short sale program. Homeowners may receive a payment, and some lenders will be compelled to approve more short sales.

In the end, in order to get junior liens released, it will be back to the grindstone for short sale negotiation companies. The use of creative deal structuring where the buyer brings in additional funds to contribute towards the excess demands of junior lien holders will continue to be very important.

If you haven't heard, the Washington State Department of Licensing is implementing a whole raft of new rules, effective July 1, 2010. The one that effects our little niche is that short sale negotiators will need to be licensed real estate agents.

http://www.dol.wa.gov/business/realestate/newlawoverview.html

I think that is good news.

There are still a lot of option-contract short sale flippers in the business who would benefit from a little more regulation and scrutiny.

In our office, all staff members already are agents, or in the process of getting their license.

And, in other news...

UPCOMING WEBINAR:
On Thursday, January 14 we will have our next short sale training webinar. We closed 7 short sales in December and want to share with you exactly what is working right now to get deals closed. We will also be covering the new HAFA program, how to get pre-approvals from lenders, how to do a bpo, how to respond to excess junior lien holder demands, and negotiating deficiency judgments, among a billion other little topics.

The goal of the webinar is to empower you to become the trusted short sale advisor for your clients and showing you how to draw on our resources and firepower to successfully negotiate all of your short sales. Pre-registration required.

http://www.SeattleShortSales.com/webinars/

DOCPAC CHANGES:
Please download the new paperwork as the previous WFA DocPac is no longer valid. Either go to http://www.SeattleShortSales.com/agents/agentlogin and download a copy or click this link and it should automatically download: http://www.SeattleShortSales.com/pdf/S3_DocPac.pdf

SAMPLE MARKETING LIST:
We build an exclusive "Notice of Default" list on a daily basis that is available for you to use in your marketing. It is a custom list that isn't available anywhere else. The names appear on the list about 30 days prior to them becoming publicly available on the "Notice of Trustee Sale" list. Click here to download a sample.

http://SeattleShortSales.com/King_County.xls
http://SeattleShortSales.com/Snohomish_County.xls

I look forward to working with you in 2010. It's going to be a great year where we are going to help tremendous amounts of people settle their accounts and get a positive, fresh-start.

To your success,

Ross Kilburn
Seattle Short Sales, Inc.
425-444-3833 (direct)
800-603-3525 (office)
888-860-1314 (fax)

The Federal Housing Administration (FHA) is currently on Capitol Hill defending the notion that it is soon to collapse under the weight of bad loans. The FHA commissioner, David H. Stevens, proclaims that they won't need a bailout and that they are adequately managing risks.

The most telling statistic of their impending collapse is that of the loans they backed in 2008, a full 20% are in default. It is not surprising that the default rate is so high. The biggest draw is that a buyer can purchase a home with only 3.5% down, and have all their closing costs covered by the seller, or in many cases, the foreclosing lender.

It is hard to imagine that in good conscience the federal government would knowingly subject 20% of their clients to the pain of default and foreclosure. However, it appears they do know, and they have a reason why they are doing it.

Barney Frank, the chairman of the House Financial Services Committee, said in an interview that the defaults were worth it. “I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

The policy is to stabilize the banks, via propping up the housing market with another round of unqualified buyers. In other words, they are propping up a deflating bubble with another artificial bubble. When will the madness end?

Loan modifications have been promoted as the 'answer' to our nation's housing crisis. The idea was that by either reducing the principal balance of the loan, or lowering the interest rate on the loan, troubled borrowers would be able to keep their home.

The first statistics that came from the FDIC were not promising. 65% of borrowers who had their loan modified via the government run IndyMac bank were in default within 6 months. Since then, the government has encouraged even more loan modifications, with the argument that the loan servicers need to lower the monthly payment for the borrowers even further to make the policy work.

Well, Fitch Ratings has come out with a report looking at a bundle of securities from 2005 to 2007 that are managed by around 30 mortgage companies. Fitch found that a conservative project was that between 65% and 75% of modified subprime loans with go into default within the first year after the modification. Even loans where the principal was reduced by 20% were still redefaulting at rates of 30-40% in the first year.

If you are a homeowner, and are not able to make your payments, the best thing to do is take matters into your own hands and get your property sold and your accounts settled with your lender. All too often, the hope for a loan modification makes homeowners wait until it is too late to sell the house and then they lose it to the auction.

Accelerating job losses in Washington. It was at 6.5% as recently as last December. The head of Employment Security's labor-market information branch calls it 'very troubling.'

Washington's unemployment rate has risen dramatically over the past year, especially since October. In December of 2007 the rate stood at 4.6%. Today it is at 7.1%. State officials are forecasting even higher numbers soon. Recent layoffs announced by Microsoft, Boeing and WAMU have yet to be incorporated into those numbers.