Underwater HomeOwners Get a Life Raft

The travails of the housing market in recent years are well documented. The prevalent symbols of this downturn are the "underwater" homeowners, who owe more on their mortgages than their homes are worth. About 4.6 million such homeowners have mortgages backed by Fannie Mae or Freddie Mac, and fully 80% of those owners haven't missed any mortgage payments.

One way out of the predicament of the underwater owner is the short sale, in which the owner sells the home for less than the balance remaining on the mortgage. It is not a perfect solution that will wipe away all financial problems, but if the mortgage company agrees to a short sale, the underwater owner can "come up for air" by making the sale and paying off at least a portion of the mortgage balance with the proceeds.

In a short sale, holders of first and second mortgages must agree to the deal, because they are accepting less than they are owed. On the whole, short sales are seen as a positive for all concerned-and for the larger economy-but they have been plagued by lengthy delays and lots of red tape.

To address these concerns, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has recently issued new short sale guidelines. A few different short sale programs will be consolidated into one uniform program, and there will be clarification of the time by which, when a foreclosure sale is pending, a borrower must submit an application and a sales offer for consideration. The larger goal is to help more homeowners avoid foreclosure, keep more homes occupied, and help maintain stable communities.

The new guidelines are just one part of a larger ongoing effort by the FHFA to facilitate various foreclosure alternatives for strapped homeowners. The FHFA recently put into place strict timelines for servicers in the short sale process. They must review and respond to short sales within 30 days of a short sale offer, provide weekly status updates to the borrower for offers still under review after 30 days, and make and communicate final decisions within 60 days of receiving an offer and the complete borrower response package.

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