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/

Seattle Short Sales has just wound up negotiations with Bank of America (as both 1st and 2nd lender) that have resulted in the lender waiving all deficiency rights.

This means that the borrowers are not required to pay back all of the money they borrowed when the house sells at a loss. But, even more significantly, in this case the lender has agreed not to pursue the borrowers at a later date for the loss, or “deficiency.”

In this case, the couple who owned the home ran into trouble because of falling house prices, which resulted in the value of their home being less than the amount of money they owed on it. When the wife was laid off work, the couple could no longer afford to pay their mortgage payments, and were forced to sell the home at a loss.

Seattle Short Sales assisted in the negotiations. Both first and second mortgages were held with Bank of America. The total that the couple owed was $284,000, but they were only able to sell the home for $179,200. After closing costs and commissions, the amount paid back to Bank of America on the two loans was $159,000.

The remainder owing on the two mortgages was $119,000 - $45,000 of that deficiency being on the second mortgage, which the lender could choose to pursue. Seattle Short Sales helped the couple reach a no-deficiency agreement with the bank, where they paid the bank a total of $10,000 to forever relieve them of having to pay back the money owing - saving them over $35,000. This is the first time that Bank of America has ever completely released a deficiency.

Read this complete Case Study: Bank of America Case Study: No-deficiency judgment relieves sellers of loss

July 2010 saw more cancellations of government-sponsored loan modifications than new loan modifications.

HAMP, the Housing Affordable Modifications Program, was initiated by President Obama in April 2009 to help homeowners who are struggling to meet their mortgage payments. The program can provide assistance for mortgage holders who want to refinance their mortgage or negotiate a loan modification with their lenders. It also includes opportunities for those who wish to mitigate their losses through short sales.

HAMP helps homeowners looking to modify their loan by giving lenders incentives to negotiate more favorable terms: for example by increasing the time period of the loan and by lowering interest rates. Homeowners start with at least three payments on “trial” before the loan modification becomes permanent.

However, nearly half of the 1.3 million loan modifications that have been negotiated under the HAMP program have been cancelled. This July, the number of new government-sponsored loan modifications grew by its slowest rate since the program started, and there were five times more cancellations than new modifications.

The Treasury indicated last week that there will be more cancellations than new trials for the coming months. This is to clear a backlog of “aged trials” from the program’s early days, when banks were encouraged to approve new trial loan modifications without supporting documents to ensure borrowers’ eligibility.

A total of 422,000 borrowers have received permanent loan modifications through HAMP. Other alternatives HAMP offers to homeowners include negotiating a short sale or a deed-in-lieu of foreclosure.

Seattle Short Sales, Inc. is a specialist in the marketing and short selling of properties in the Seattle area. Please contact us with any of your questions about short sales.

For almost three years, the jumbo mortgage market has been nearly frozen. But the banks have recently decided it is time to re-start lending to the high-end market, and homeowners are beginning to find relief.

A jumbo mortgage is a loan of more than $729,750, not backed government-sponsored enterprises such as Fannie Mae or Freddie Mac. Last year at this time, the average rate was 6.86%. Today, it is 5.48, a rate that homeowners haven't seen since 2003.

In this foreclosure crisis of the Great Recession, the first homeowners hit were the ones with adjustable rate mortgages in lowered priced properties. When the mortgage reset, or the homeowner lost their job, there wasn't any safety cushion, and the properties were quickly taken back by the banks.

The next wave of defaults were on higher-priced properties. In general, homeowners in higher-end properties had more financial cushion to ride out the downturn. However, due to easy qualifying terms in previous years, many homeowners with jumbo loans realized they they had purchased more house than was necessary.

The problem over the last three years was that if the owner of a higher-end property wanted to sell, whether they had equity or not, they had trouble finding buyers who could get a loan. This lack of buyer financing created pressure on high-end house prices, further exacerbating problems for high-end homeowners.

High-end properties increasingly became situations where the homeowner owed more on their loans that the property could be sold for. In this case a short sale was necessary. Short sales can be difficult in themselves. Faced with a high-end short sale property, with a lack of buyer financing, it became an ever more dire situation.

The new lower rates are going to be a tremendous relief to the high-end market. More-affordable jumbo loans will not only allow some homeowners to re-finance into a more affordable loan product, but allow more buyers to move into higher end properties.

To validate this trend, Citibank announced that applications for jumbo mortgages were up 30% over the last 60 days. Vijay Lala of Bank America stated that they are now offering competitive rates in the jumbo market, stating, "We are very active in that marketplace, and we believe that jumbo loans will help lead the recovery in housing."

Seattle Short Sales, Inc. is a specialist in the marketing and short selling of high-end properties in the Seattle area. Please contact us today and we would be glad to answer all of your short sale questions.

Today, Lender Processing Services (LPS) issued their latest report on foreclosure and short sale statistics, across both the United States, and here in Washington State. Overall, the trends are not positive. The total percentage of borrowers in the United States that are delinquent (excluding Foreclosures) is at 9.2%. This is a year-over-year increase of 7.9%. Foreclosure inventories increased by 13.5% during the same period.

The one bright spot is that completed short sales are on the rise. The increase in the last quarter was 9.2%. Over the last year, the number of completed short sales rose from 18,619 to 41,030 - an increase of 120%.

In Washington State, the number of non-current borrowers has stayed roughly the same in the last year, at 8.7% (excluding foreclosures). In regards to short sales, here at Seattle Short Sales, Inc. we have seen a tremendous increase in homeowner awareness concerning short sales. Many homeowners have taken the time to educate themselves on the benefits of a short sale on their credit score and future borrowing capabilities.

If you are a homeowner, please contact us today for assistance.

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.

In the month of April, 2010 - Seattle Short Sales, Inc. received 22 short sale approval letters. The total discounted debt totaled $2,244,000. Since Feb 15, 2010 - Seattle Short Sales, Inc. has received 56 short sale approval letters.

Of the 22 short sale approval letters received in April, 15 banks were represented. BAC Home Loans (Bank of America's servicing arm) and Wells Fargo each had three, while Chase, CMS Carrington and Indymac had two each.

The fastest company was Specialized Portfolio Servicing, generating an approval letter in only 15 days. Hot on their heels was HSBC at 16 days. The majority fell in the 30-90 day range, measured from the day we submitted the file to receiving the approval letter.

The longest was Bank of America Home Loans with an approval letter that took 290 days, with Chase, not far behind at 221 days. These two weren't surprising. The Bank of America loan was a former Countrwide Loan, and the Chase loan was a former WAMU/Long Beach loan. Historically, those two loan portfolios have taken the longest to negotiate.

If you are a homeowner, and have any questions about short sales, and how to get started, please fill out this form.

Best,

Ross Kilburn

In Washington State, by the last day of February 2010, 9.1% of loans were delinquent. This figure was provided by a new report issued by Lender Processing Services. LPS states that of those delinquent loans, 7.8% were already in default and starting the foreclosure process.

Nationally, the total non-current loan figure, including both delinquencies and foreclosures is at 13.5%. This includes 1.1 million loans that were current at the beginning of January and became delinquent or entered foreclosure as of February month end.

In February, nationwide, 4.56% of loans rolled into 'worse' status vs 2.22% that improved. Total delinquencies nationwide increased 21.3% since February 2009.

These numbers are staggering. The one bright spot is that HAMP loan modifications seem to be picking up speed. In addition, the new HAFA (Home Affordable Foreclosure Alternatives) is just starting to roll out, and should help homeowners pursuing short sales.

Seattle Short Sales, Inc. has seen a dramatic increase in homeowners pursuing short sales in the Seattle area. For help with your situation, please contact us today.

Many homeowners considering a short sale as an option to avoid foreclosure, ask Seattle Short Sales, Inc. what it takes to get their short sale approved.

The answer is that it varies by case. It depends on the policies of the investor who owns the loan, and the polices of any mortgage insurance company that may be insuring the loan for the investor.

One mortgage insurer, Mortgage Guaranty Insurance Corp. (MGIC) just released new guidelines for expedited short sale approvals. These guidelines are provided to the servicers of the loans. In most cases, if you are making your mortgage payments to Bank of America, Wells Fargo, or Chase, your lender doesn't own the loan. They are simply servicing the loan for the investor. Investors may be private hedge funds or Fannie Mae or Freddie Mac.

Servicers must get approvals from the investors and, if applicable, the mortgage insurance companies to move forward with a short sale. The new MGIC guidelines give an automatic fast track go-ahead if the short sale application meets certain criteria.

• The property must be owner-occupied and at least 60 days delinquent
• The loss on the sale must not be greater than $75,000, based on a broker price opinion (BPO) or appraisal performed within 90 days of the sale.
• The property must be sold in “as-is” condition
• The sales price must be within 90% of the home’s value after repairs.
• Net proceeds at closing must be at least 82% of the “as-is” value.
• The borrower cannot receive any money from the short sale
• The borrower must prove a hardship. Acceptable hardships include job loss, involuntary relocation, divorce, reduction in income used to sustain mortgage debt, serious illness or a call to military duty.

The servicer must first determine credible hardship. Then, the servicer must analyze the borrower's financial situation. The borrower’s monthly positive cash flow must be less than or equal to $200, short-term savings must be less than the total of three full mortgage payments and long-term savings are less than or equal to $50,000.

If these guidelines aren’t meant, the servicer must submit the short sale request to MGIC for review and approval.

In Seattle, many short sales and homeowners do not fit this criteria. The majority of short sales that Seattle Short Sales, Inc. works on have total discounts well over $100,000. It may mean that the short sale application takes a bit longer, but in the end, if the lender views that the offer on the property is fair-market value, then they are inclined to take the offer.