LawsonGroupMediation

Recently, Fannie Mae has started placing in their short sale approval bank release documents the condition that a subsequent transaction for the named property may not occur for 30 days following the short sale transaction.

I have received word from Freddie that they are moving to establish their own policies to prohibit or limit double closings of short sales. Since both entities are government owned and own more than 65% of the mortgage loan notes, it is apparent that they are attempting to recover losses from investors who purchase by option contract directly from a homeowner for when they might obtain a higher sale price if was listed on the open market in the MLS.

A great number of homes are being saved from foreclosure by investors. It is true that Fannie & Freddie are potentially receiving less money through double closing by investors, but they are still making more than they would in a foreclosure and selling the property as an REO (bank owned). To stop double closings would likely have the effect of reducing the numbers of homes saved from foreclosure. While they may mitigate their losses better by obtaining higher sale prices on the open market, it remains to be seen if the losses from these investors are greater than they would incur without these investors.

Another argument is that investors using options contracts to find other buyers for a double closing may not be having to pay broker commissions, so the net to the lender will still be quite high.

Most of the secondary market investors (SMI) like Fannie and Freddie have a minimum net to lender threshold percentage of the fair market value, so as long as the deal nets to them this threshold percentage they should not care.

There is a legal problem with this prohibition. Title companies face potential legal liability if they refuse to close the second transaction per the condition. The result? They may refuse to close on the short sale transaction, or they may ignore the condition and close on both transactions anyway.

Could the lender revoke their approval? The bank release documents comprise a legal contract. The contract is fulfilled upon their acceptance of the wire transfer. Once that transfer has been accepted by the lender, the contractual relationship ends. They could sue for damages, but they may have a difficult time showing any damages. The condition may be unenforceable.

It will be interesting to watch this development. I will wrote more about this as more information comes my way.

Purchase our instructional book guide: Short Sales & Loan Modifications: A Practical Guide For Real Estate Agents and Investors