Mortgage servicers will be kept to strict short sale timelines agreed to under the state Attorneys General foreclosure settlement this week.
Along with the penalties and relief for borrowers, the five largest mortgage servicers must adhere to a set of new standards. Servicers will form internal groups that will conduct quarterly reviews and gauge compliance. North Carolina Banking Commissioner Joseph Smith will approve the groups and monitor the reviews.
Among the standards, however, are new requirements for short sales.
Servicers are required to give a decision to a borrower within 30 days of receiving a completed short sale request package.
The internal group must review all short sale requests in the first two months of the quarter, according to Exhibit E in the settlement filed this week. And if a servicer takes longer than 30 days on more than 10% of the requests, the firm is considered in "potential violation."
The settlement also requires a servicer to notify a borrower within 30 days if any documents are missing from the request package.
Servicers will also be required to notify a borrower if there is a deficiency payment needed before the short sale is approved, including an approximate amount.
If more than 5% of all short sales approved in a given quarter did not include this disclosure, the bank would be in violation.
"If a real estate broker can get a checklist from the bank detailing what documentation is needed, everything can be provided up front, and the bank will be required to give a thumbs-up or a thumbs-down within 30 days. That's not a bad deal," said Chris Hanson of the short sale specialist Hanson Law Firm.
Short sales became notoriously arduous, lengthy, and oftentimes fraudulent process since the foreclosure crisis struck in 2007.
There were 88,303 short sales in the fourth quarter, up 15% from one year prior, according to RealtyTrac. The short sales completed in the fourth quarter took an average 308 days since the borrower entered foreclosure, down from 318 days in the previous three months.
"We continued to see a shift toward pre-foreclosure sales, or short sales, and away from REO sales in the fourth quarter," said RealtyTrac CEO Brandon Moore in a fourth quarter report.
The Treasury Department released the first national standards for short sales under its Home Affordable Foreclosure Alternatives program, which began in 2010. Its timeline matches the AG settlement.
According to HAFA guidelines, a servicer must consider a borrower for HAFA within 30 days of the borrower either failing a Home Affordable Modification Program test or requesting consideration for a short sale.
Chase said it completes short sales – from receiving full documentation to approval – in a little more than one month.
But under the settlement, there is some enforcement to the guidelines.
When a servicer fails any servicing standard metric, including the short sale timeline, representatives must meet with a monitoring committee overseen by Smith. The servicer will have the right to correct any potential violation by installing an action plan, according to the settlement.
If the potential violation is not cured, a servicer could face a penalty up to $1 million and another $5 million fine for repeat violations.