Do Fannie Mae, Freddie Mac, FHA, VA, and USDA waive deficiency judgments for short sales?
Fannie Mae used to ensure that the deficiency would be waived with all loans that they own or guarantee. However, in 2011 Fannie Mae made an amendment to that policy. Fannie Mae now reserves the right to pursue a deficiency judgment on people who they believe strategically defaulted on their mortgage. In other words, if Fannie Mae learns that the borrower had no hardship and the financial means to continue making payments for the foreseeable future, then they may sue the borrower after the short sale for the remaining amount plus collection costs.
Freddie Mac waives the deficiency on all loans they own or guarantee. Per Freddie Mac Bulletin Number 2012-5, issued on February 15, 2012, it states, “We have updated the Guide to reinforce the requirement that the Servicer, for itself and on behalf of Freddie Mac, must waive all rights to pursue payment of the remaining balance owed by the Borrower under a Freddie Mac-owned Mortgage for all approved short payoffs and deed-in-lieu of foreclosure transactions that have closed in accordance with the Guide and applicable law.”
The Federal Housing Administration (FHA) insures more mortgage loans than any other entity. As part of the Department of Housing and Urban Development (HUD), FHA issues an Approval to Participate (ATP) for their short sales under what is known as the Preforeclosure Sale Program (PFS). FHA waives the lender’s right to pursue a deficiency on short sales and on foreclosures where an ATP was issued but the property did not sell. In Mortgagee Letter 2008-43, dated December 24, 2008, it states, “A PFS sale must be an outright sale of the property. If a foreclosure occurs after the mortgagor unsuccessfully participated in the PFS process in good faith, neither the mortgagee nor HUD will pursue the mortgagor for a deficiency judgment.”
The Veterans Administration (VA) may reserve the right to pursue a deficiency judgment on some loans, and its right to do so may supercede the laws of some states. In the 1961 case, United States v. Shimer 376 U.S. 374, the U.S. Supreme Court ruled that the VA had the right to pursue a Pennsylvania veteran who had defaulted on his loan even after the VA seized the house via a Sheriff’s Sale.
The U.S. Department of Agriculture may reserve the right to pursue a deficiency judgment. In Chapter 6: Liquidation And Acquisition of HB-2-3550, USDA states, “When sales proceeds will not fully satisfy the debt, CSC (Centralized Servicing Center) will make the determination of whether the borrower will be released from personal liability. This determination is based upon a Debt Settlement Package completed by the borrower and forwarded to CSC for review and approval.”