Just when it appeared that national lending guidelines were beginning to loosen, making it easier for people to purchase homes, the Federal National Mortgage Association (Fannie Mae) has announced that it is doubling the waiting time, from two years to four years, before past short sellers can jump back into the market. The new rule is effective, Aug. 16.

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A short sale is a transaction where a lender has agreed to take a loss by allowing the borrower to sell his or her home for less than the outstanding balance on the mortgage. After the real estate crash, there have been about 2.5 million short sales, so these new Fannie Mae short sale guidelines could affect thousands of consumers, so-called boomerang buyers, who had planned on becoming homeowners, sooner rather than later.

The extended waiting period from two years to four years also applies to a deed-in-lieu-of foreclosure, which is very similar to a short sale. The difference is that instead of the troubled borrower (late on mortgage payments) selling the home for less than what the lender is owed, the borrower assigns the title of his property back to the lender to avoid a foreclosure, a far more damaging event on a credit report that can keep a person out of the homebuying market for seven years.

Fannie’s action was taken to prevent the kinds of problems that led to the Great Recession, with people borrowing beyond their means to purchase homes that their income or credit did not support. “The presence of significant derogatory credit events dramatically increases the likelihood of a future default and represents a significantly higher level of default,” Fannie Mae said in announcing the rule.

Not all happy campers

Any Fannie Mae announcement is significant because as the biggest buyer of mortgages in the country, it largely dictates the underwriting standards and rules that it wants lenders to adhere to.

Some lenders go along grudgingly.

“Frankly, I think this new rule is bad news,” said Kent Sorgenfrey, a lender with Irvine, Calif., lender, New American Funding. “Why on earth would you punish borrowers who have already been punished by what was essentially a government-induced crisis?

“Prior to the crash, no one had ever heard of short sales. Like a unicorn, it was a unique phenomenon you’re not going to see again. To suggest that borrowers who have suffered a recent short sale are somehow a greater credit risk is misguided policy that could hurt the housing recovery.”

Although Fannie’s pull-back from two to four years may throw thousands of former short sellers in limbo, forcing them to postpone their reentry into the home-buying market, the announcement was not totally unexpected.

“Fannie was always the outlier on this,” said Ted Rood, a national lender based in St. Louis, Mo. “Freddie Mac’s [the Federal National Mortgage Corporation, also a buyer of mortgages] waiting period has been four years.

“It’s interesting that this time Fannie is conforming to Freddie’s standards.”

In the short term, Rood and other lenders and real estate agents predict that Fannie’s new rules will stir more interest in Federal Housing Association (FHA) loans.

“With FHA loans, there’s only a three-year waiting period, with a downpayment as low as 3.5 percent,” Rood added. The wait period for Veterans Administration (VA) loans is also three years. (The MBT mortgage calculator can help you figure your monthly mortgage payments for both government and conventional loans.)

Only good excuses accepted

Not all is gloom for conventional loan borrowers, however, in the wake of Fannie Mae’s announcement. Fannie has provided them with a little wiggle room. If the homeowner can show that the short sale was due to extenuating circumstances, then the waiting period might be reduced back to two years.

“The burden of proof squarely rests with the borrower,” Rood noted. “Everything has to be extremely well documented.”

According to Fannie, qualifying circumstances are “non-recurring events that are beyond the borrower’s control that result in a sudden, significant and prolonged reduction in income or catastrophic increase in financial obligations.”

“We’re talking like a heart attack,” Rood said. “Divorce likely wouldn’t qualify unless you can prove your ex was going after you, forcing you to move out of your house. Every lender will interpret these extenuating circumstances differently.”

Inherent in Fannie Mae’s doubling of its time frame for past short sellers is the maxim that “good things come to those who wait.”

Formerly, borrowers who met Fannie Mae’s two-year waiting period had to put 20 percent down. Under its new four-year guidelines, buyers can put down only 5 percent, if they choose. Those who executed a deed-in-lieu foreclosure also will be able to put down only 5 percent after meeting the four-year waiting period.

Ann Krauter, a real estate agent with ReMax in Glendora, Calif., believes Fannie’s new short sale guidelines are a plus.

“First, I like the fact they’re in alignment now with Freddie Mac’s guidelines,” she said. “This kind of uniformity brings more clarity to the market. Second, and more important, I think it ushers in more discipline for borrowers. This seasoning requirement gives borrowers a little more time to save money, strengthen their credit and get back on their feet financially.

“I view the new rules less as a setback for borrowers and more as a comeback for borrowers. When they’re ready to buy, they’ll be coming back the right way.”

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