The new housing bill that President Bush just signed into law is now having its effects on our Real Estate economy. For those not familiar with the law, one part of the new legislation gives an unlimited line of credit to Freddie Mac and Fannie Mae to stabilize the U.S economy. With that infusion of available funds, Freddie Mac has responded by offering an unprecedented amount of money to pay banks whenever they execute a successful short sale.

 

To understand the significance of this move, it’s important to understand the difference between an bank and a lender. Think of banks as the “middle man” in a real estate transaction. Very little of the money “loaned” by the bank is actually theirs. More likely, the funds come from other investors supporting the bank, and counting on financial institutions like Bank of America, Countrywide, Wells Fargo and other large banks to service the mortgages. The banks collect payments and send out notices, process foreclosures and arrange forbearance plans such as short sales and loan modifications.

 

The real lenders are as I said, are the investors, and they are the ones who actually make the decisions. The largest investors are Freddie Mac and Fannie Mae, referred to as “GSE’s” or Government Sponsored Enterprises.

 

These lenders are a group of financial service corporations created by the United States government. Their job is to ease the flow of capital to the three most targeted sectors of the economy: education, agriculture, and home finance. Residential mortgages form by far the largest of the borrowing segments in which the GSEs operate. The three largest GSE’s, Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks, have several trillion dollars of assets.

 

Recently, Freddie Mac announced that they will now pay them $2,200 for each short sale a bank successfully completes. But the great news is that the local banks we work with will have more incentive to agree to a Short Sale and there will now be more resources available because the value of a Short Sale just grew significantly.

 

This is a clear message to banks that short sales are the preferential method of a pre-foreclosure action. Presumably this announcement will translate to faster processing time and a better deal for everyone involved.