OLR Report 2013-R-0400 summarizes the potential impact of requiring banks to (1) set a floor on any given short sale price in Connecticut and (2) accept or reject offers above that threshold within a certain time period. It also examines what other states have legislated in this area.
A short sale, also known as a pre-foreclosure sale, is when a person sells his or her home for less than the balance remaining on the mortgage. If the mortgage company agrees to a short sale the property is sold and the proceeds are used to pay off all, or a portion of, the mortgage balance.
The report does not identify any state that has passed legislation specifically requiring banks to (1) set a floor on any given short sale price and (2) accept or reject offers above that threshold within a certain time period. It did not find any study that assesses the potential impact of making such requirements law. However, various sources addressing similar proposals to increase regulation of short sales indicate that such measures could have several potential effects. These range from removing barriers to short sales and preventing foreclosures to increasing the cost of getting mortgages and decreasing their availability.
According to the National Conference of State Legislatures (NCSL), in 2013, 38 states considered legislation regarding foreclosures. At least seven states considered bills regarding short sales. None of these bills specifically addressed setting a floor on short sale prices. However, both Florida and Connecticut considered legislation that would establish decision-making timelines. One Florida bill would require a lienholder to approve a short sale and execute any documents necessary to close the sale within a specified time period, if a debtor finds a buyer who makes an offer in writing equal to the property's fair market value. The Connecticut bills would add a foreclosure option called foreclosure by market sale. This is a court-approved sale on the open market where the court, as opposed to the bank, sets the sale date which must be a certain number of days of approving an offer.
In general, Connecticut law does not specifically govern short sale transactions, other than debt negotiators' licensure requirements. OLR Report 2013-R-0083 summarizes these requirements in short sale negotiations.
In assessing the impact of making changes to state foreclosure laws, note that the banking industry operates under a dual regulatory system, federal law and state law. Federal law preempts state law regarding federally chartered banks on a number of issues. As such, the impact of certain changes in state law is generally limited to state chartered banks.
Also note that federal guidelines expediting the short sale process went into effect in 2012 for mortgages owned or guaranteed by Fannie Mae or Freddie Mac. According to the Federal Housing Finance Agency (FHFA), these federal agencies back three out of every four residential mortgages in the United States.
For more information, read the full report.
