Concerning FHA Short Sale Dept. using outdated appraisals for comparables.

I am representing a client who is currently marketing his property for short sale.

We are working with the Government Loan Short Sale Dept and have just received a rejection for an offer that was submitted for the purchase of this home.

 

The reason for the rejection was that we were below lender's desired net price.

 

I asked our negotiator what that net price would be and was given an amount that, with escrow fees, would hardly appraise in this market. 

I then asked for a current appraisal to be done. I was told that 2 appraisals have been done and no further appraisals would be performed.

 

I have requested a desk review and received back these requirements in submitting request for review  - I would need to submit 3 comparables that closed less than 6 months before the effective date of the appraisal (no current  market date - pending, sold after appraisal, under contract is NOT acceptable.)

 

I then asked for a copy of the last appraisal and was shocked to see that the last appraisal was performed on 2/17/2010.

I would have to submit comparable that are 1 year - 1 1/2 years old.  The average market price in our area has dropped at least $30 sq. ft. in this time and I'm concerned that this lovely home won't appraise for the prices that were acceptable in our market 1 1/2 years ago.

 

Can anyone please advise me in how I can best serve my client in moving forward?

 

Thanks

 

 

 

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Permalink Reply by Michael Schneider on February 10, 2012 at 4:52am

@Dorothy  Well known problem with FHA short sales IMHO.  The FHA valuation guidelines are outdated, inconsistent with market reality, based on stable prices, and cause additional loss to the FHA insurance fund. btw, you did not include one of the most misguided requirement for comps.  They cannot be short sales.

In my experience, once the appraised value is well above market value, there may not be much you can do.  Some people report success in convincing the FHA to lower value.  My experience is that this doesn't work.  So, basically, you must get the first appraisal at market value.

Unfortunately, I think your clients may be best served by advising them to request a DIL. The FHA often will grant the seller a larger cash incentive for a DIL, assuming it actually competes.

I have perhaps four clients who have requested DILs from the FHA.  I think none have actually conveyed, the properties just stuck in limbo.  But, your client may be protected from the obligation.

The FHA should be taken out of this stage of servicing.

Permalink Reply by Jeff Payne on February 10, 2012 at 4:57am

Michael, you are spot on, this is a big problem with FHA short sales as well as VA short sales.

Imagine that an appraisal is 5 months old and 5 months ago they used comps that were 6 months old. The comps are actually 11 months old.  One area that I service, single family homes decreased 19% in value in 2011. 

Not sure what it will take to get FHA and VA to change these rules but we need to do something

 

Permalink Reply by Dorothy Kim Turley on February 10, 2012 at 5:26am

Thanks Michael,

We already went the DIL route - we weren't accepted so they suggested we start the short sale request process all over again....thus the 2nd appraisal!

Permalink Reply by Dorothy Kim Turley on February 10, 2012 at 5:35am

I pulled up APPRAISAL DISPUTE under FHA-HUD SHORT SALES and #4 states that an appraisal that is more than 6 months old or a BPO that is more than 3 months old cannot be disputed.

Wouldn't that give me room to request a new appraisal?

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Permalink Reply by Michael Schneider on February 10, 2012 at 5:50am

We can try again with the FHA, Jeff.  Maybe together we can get some hearing within the citadel.

I was not able to.

Also, there is the "FHA as sacred cow" factor.  "Where would we be if not for the FHA!".

So, lets just overlook that they are causing $B's of unnecessary losses to the insurance fund.  And, btw, I've looked at the published reports in the HUD Library.  There is no reporting on PFSP that let's you estimate total unnecessary loss to the insurance fund.

I think they would say, "We need to balance the loss to the insurance fund against our mandate to help our borrowers".

Permalink Reply by Jeff Payne on February 10, 2012 at 6:35am

Michael, I will bring this up with leadership during our short sale mastermind next week.  Maybe someone with some influence can set up a meeting for us....

Permalink Reply by Michael Schneider on February 10, 2012 at 6:19am

@Dorothy Were they in the Preforeclosure Sale Program?

If not, you must apply, I think.  If so, then the sellers may be (probably are?) protected from the deficiency, whether the property goes DIL or forecloses.  If there are other encumbrances, then the DIL is probably not possible, as those encumbrances would travel with the property under the DIL.  So, HUD would need to foreclose to extinguish liens.

So, FHA financial reality:  They may be best served by allowing the property to foreclose and moving out when forced to do so.  Only the sellers can decide if this is best for them.

BTW, you can always ask the Servicer to request a variance from the FHA.  Present something reasonable, and see if you can get the variance.  I have success with variances, just not in this area.

Permalink Reply by Kevin - Greenville, SC on February 10, 2012 at 11:35am

Yes, It is clearly stated in Mortgagee Letter 2008-43 that the Borrower is released from further liability.

Permalink Reply by Leslie Wasgatt on February 13, 2012 at 3:48am

Hi Kevin, Please help me to understand a little better...I have read the Mortgagee Letter 2008-43 and do not see where it "clearly" states that the Borrower is released from further liability unless they actual fail to complete the PFS program, " If the PFS is unsuccessful and foreclosure occurs, mortgagors who participate in the PFS Program in good faith will not be pursued for deficiency judgments by the mortgagee or HUD.".

 Is there somewhere in the letter that I missed where it states that if you complete the program you will be waived? I know it would only make since for a waive if they are willing to do so even when a homeowner is not successful in completing but we all know when it comes to legality that it can be misconstrued if not in black in white. Thanks in advance for any direction or help you can offer towards comforting our HUD homeowners who are participating in this process. 

Permalink Reply by Michael Schneider on February 13, 2012 at 4:32am

Look for this phrase in ML 08-43

Mortgagors, acting in good faith, who successfully sell their properties using this option are relieved of their mortgage obligation

This is the only documentation that I know of.  Generally, the demand will state "full sat".

Permalink Reply by Leslie Wasgatt on February 13, 2012 at 4:49am

Thanks Michael, After re-reading it for the fourth time I was able to find it, much like Where's Waldo. Thank you again for sharing the exact verbiage to help me locate it. Our demand did not state "full sat" so this puts everyone at ease.

Permalink Reply by Michael Schneider on February 13, 2012 at 4:55am

Yes, exactly, I think Jim Schneider pointed this out to me, when I do could not find documentation.  I think your seller is okay on the deficiency, but only they can decided that. I have been successful on some occasions getting the FHA Servicer to state full-satisfaction explicitly.  Others not.

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