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Short Sale Guidelines Could Cause Short-Term Losses to Lenders: Fitch

Earlier this week, FHFA, Fannie Mae, and Freddie Mac ""revealed new short sale guidelines"":http://dsnews.comarticles/short-sales-will-find-approval-faster-through-new-guidelines-for-gses-2012-08-21 to take effect November 1 of this year.

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The new guidelines are expected to make short sales easier to process and will open up the foreclosure alternative to borrowers not in default if they have certain hardships.

While ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp views these new rules as a plus for the housing market in the long term, the ratings agency said, ""in the short term, the new guidelines could increase losses on some existing bank home equity or second lien portfolios.""

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The ratings agency made it clear that it believes foreclosure alternatives are good for the market. For lenders, the positives come in the form of not having to deal with the lengthy and costly problems foreclosures bring.

""For example, short sales on non-agency RMBS are currently finishing 20 months after the last payment made on the loan. That is approximately 10 months shorter than the average time to foreclose. Similarly, the loss severity on prime non-agency mortgages is 14% lower on short sales than REO sales,"" Fitch stated.

Another important provision from the new guidelines is one which addresses issues with subordinate lien holders. In order to prevent second lien holders from stalling approval, the GSEs will offer lenders up to $6,000.

Fitch noted that over the short term, the impact of this new guideline on lenders will ""vary greatly, as the carrying, legal, servicing, and opportunity costs range broadly across many loans.""

The ratings agency also added that ""many of the 2005-2008 vintage home equity lines of credit are still in their interest-only stages and likely to begin amortization in 2014-2015, which may further pressure home equity performance over the intermediate term.""

About Author: Esther Cho

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