On November 25, Freddie Mac issued Bulletin 2013-24 and Fannie Mae issued Servicing Guide Announcement SVC-2013-23, which revised numerous short sale and deed-in-lieu of foreclosure (DIL) requirements. The enterprises updated, among other things, eligibility requirements for exceptions to borrower documentation for short sales and DILs by (i) permitting a borrower whose mortgage debt has been discharged in a Chapter 7 bankruptcy to be eligible for an exception to documentation, regardless of FICO score; and (ii) removing mortgages that were originated as investment properties from eligibility for an exception to documentation. The enterprises also required servicers to: (i) submit a short sale or DIL recommendation for approval when the borrower’s cash reserves exceed $50,000; and (ii) delay, or ensure that foreclosure counsel delays, the next legal action in the foreclosure process when such servicers receive a first complete borrower response package (BRP) more than 37 days prior to a scheduled foreclosure sale date, and the evaluation results in an offer to proceed with a short sale or DIL. Finally, the enterprises revised the timeframes within which servicers are required to conduct an expedited review of a completed BRP and updated requirements relating to borrower appeals.
On June 3, Freddie Mac announced revisions to numerous servicing policies, including policies regarding, among other things, short sales and deeds-in-lieu of foreclosure (DILs), the CFPB’s mortgage servicing rules, and unemployment forbearance. Bulletin 2014-10 advises servicers that for new short sale and DIL evaluations conducted on and after August 1, 2014 (or sooner if a servicer chooses), Freddie Mac will permit a servicemember to qualify for a short sale or DIL provided the mortgaged property is or was previously the borrower’s primary residence. When such a short sale or DIL is approved for a servicemember as provided above, the servicemember will receive the existing benefits afforded to a service member with PCS orders. In addition, for any borrower seeking a short sale or DIL, Freddie Mac is establishing a new lookback period that requires the servicer to review the borrower’s credit report to determine that the borrower did not obtain a new mortgage in the six months preceding the delinquency or in the six months preceding the evaluation of the borrower for a short sale or DIL. In addition, Freddie Mac (i) is now requiring servicers to investigate any inquiries by mortgage creditors that appear on the borrower’s credit report to determine if the borrower obtained a mortgage in the lookback period; and (ii) soon will require the servicer to rely solely upon the results of the cash reserves and promissory note payment capacity formulae to determine when to request a contribution from a borrower who is 31 days or more delinquent. The Bulletin also includes revisions to the following requirements introduced in response to the CFPB’s mortgage servicing rules: (i) trial period payment adjustments after the borrower exercises the right to appeal; (ii) delay in referral to foreclosure or proceeding with the next legal action; (iii) foreclosure sale date timing; and (iv) borrower solicitation letters. Finally, among several other policy revisions, the announcement details unemployment forbearance policy changes similar to those announced by Fannie Mae on June 4, 2014.
On November 20, the FHFA Office of Inspector General (OIG) issued a report critical of Fannie Mae’s oversight of its short sale process and the servicers who participate in that process. The OIG determined—based on a review of 41 short sale transactions handled by multiple Fannie Mae servicers—that five servicers were not always collecting all of the required documentation before making borrower eligibility determinations or seeking Fannie Mae approval. The report states also that servicers sometimes failed to conduct adequate reviews supporting borrower eligibility determinations. Further, the OIG found that borrowers with potentially significant financial resources sold multiple non-owner occupied properties through Fannie Mae’s streamlined documentation program, which allows servicers to approve short sales based only on low FICO scores and delinquency status. The OIG recommends that Fannie Mae strengthen its oversight of the short sale program by (i) enforcing the requirement that all borrowers outside the streamlined documentation program provide a borrower-certified borrower assistance form; (ii) establishing controls to identify and resolve inconsistencies between the borrower assistance form and supporting documentation; (iii) considering whether its servicer compensation structure should include the quality of borrower eligibility determinations for short sales and success in limiting losses; and (iv) enhancing controls over collection and use of electronic information from servicers on the financial condition of borrowers. The OIG also suggests that the FHFA should: (i) determine whether the streamlined documentation program should be available to borrowers seeking approval to short sell non-owner occupied properties; and (ii) provide examination coverage of Fannie Mae’s short sale activities with particular emphasis on identifying systemic deficiencies related to borrower submissions, Fannie Mae eligibility determinations, servicer compensation structure, and reliability of electronic information used in managing short sales.
On July 23, the California Court of Appeal, Fourth Appellate District, held in a case of first impression that a section of California law that prohibits a deficiency judgment following a foreclosure on a purchase money loan similarly protects borrowers in short sales. Coker v. JP Morgan Chase Bank, N.A., No. D061720, 2013 WL 3816978 (Cal. Ct. App. Jul. 23, 2013). In this case, the lender approved a short sale subject to several conditions, including that the sale proceeds paid to the lender released the lender’s security interest, but that the borrower still was responsible for any deficiency balance. After the sale closed, the lender sought to collect from the borrower the unsatisfied portion of the loan. The borrower filed suit claiming that state law and common law prevented the lender from collecting. On appeal, the court reversed the trial court’s dismissal and held that a state law that has been applied to prohibit deficiency judgments following foreclosure sales also prohibits deficiency judgments following short sales. The court explained that there is nothing in the statute to modify or limit the term “sale” and no other requirement in the statute that a foreclosure must occur to trigger the deficiency judgment protections. Further, the court rejected the lender’s argument that the borrower waived the protection by agreeing as a condition of the sale to be liable for any deficiency after the sale. The court reversed the trial court and remanded for further proceedings.
On December 13, Fannie Mae issued Servicing Guide Announcement SVC-2012-26 to update the maximum allowable foreclosure attorney fees for mortgage loans, participation pool mortgage loans, and MBS mortgage loans serviced under the special servicing option secured by properties located in Idaho, Montana, New Hampshire, Puerto Rico, U.S. Virgin Islands, and Wyoming. All listed fee revisions are effective as of January 1, 2013. Concurrently, Fannie Mae issued Frequently Asked Questions regarding its standard short sale and deed-in-lieu of foreclosure requirements, which were announced last month in SVC-2012-19.