Borrowers who don't qualify for a loan modification under the Home Affordable Modification Program (HAMP) will soon have another foreclosure avoidance program available to them. Starting April 5, troubled mortgage borrowers who don't qualify for HAMP, whose trial loan modifications fail or who qualify for modification but prefer a short sale/deed in lieu of foreclosure, will have a new option. The Home Affordable Foreclosure Alternatives (HAFA) program is designed to streamline the short sale/deed in lieu process and help mortgage lenders and borrowers resolve defaults without expensive foreclosures and evictions.
Why Most Short Sales Fail
Right now, the short sale process is fraught with uncertainty for both buyers and sellers. According to USA Today, only about one in five short sale listings actually close. In most cases, mortgage lenders don't disclose what price they are willing to accept and may not even respond to buyers' offers until they have received several. Very often, buyers get discouraged and take their offers elsewhere, leaving sellers to start all over. It's not uncommon for the lender to finally accept an offer, only to throw a last-minute monkey wrench into the deal, like a requirement that the seller signs a promissory note for any deficiency (difference between value and amount due).
This lack of success hurts the housing market as a whole. For example, short sale buyers might require bigger discounts to compensate them for inconvenience and uncertainty, which would increase the loss to the lender while pushing housing values down for the neighbors. It's a lose-lose-lose situation.
How HAFA Helps
HAFA creates a standardized and more structured short sale process that is designed to take the guesswork out of the process. Buyers and sellers will know exactly what the lenders require, and there will be standard timelines and deadlines for all -- for the first time, short sale buyers will know when they can expect to close escrow and take possession of their new properties. In addition, HAFA confers the following benefits:
- Borrowers gets a minimum of 120 days to market the property without threat of foreclosure;
- Borrowers may get a reduced mortgage payment (to 31% of gross monthly income) while marketing the property;
- Mortgage lenders must accept proceeds of sale as payment in full and cannot sue for any deficiency, even in recourse states;
- Borrowers get $3,000 in relocation funds to move to new homes; and
- Second lien holders may get up to $3,000 to release their claims.
Mortgage lenders will no longer string out short sales for months on end. Here's how the HAFA short sale timeline works:
- Borrowers get 14 calendar days from the date of the Short Sale Agreement (SSA) to sign and return it to the lender. Borrowers get an initial period of 120 days to sell the house, but may be granted extensions for up to a total of 12 months.
- Within three business days of receiving an executed purchase offer, the seller (or agent) must submit a completed Request for Approval of Short Sale (RASS) to the servicer, including:
- A copy of the complete sales agreement;
- Buyer proof of funds or preapproval/commitment letter from a lender; and
- The status of subordinate liens and/or negotiations with subordinate lien holders.
- Within 10 business days after the servicer receives the RASS and all required documents, it must approve or deny the offer and advise the homeowner.
- The servicer may require the closing to take place within a reasonable period after it approves the RASS, but not sooner than 45 days from the date of the sales contract unless the homeowner/seller agrees.
- The servicer must release its first mortgage lien within 10 business days (or earlier if required by state or local law) of receipt of sales proceeds.
Who Is Eligible for HAFA?
Homeowners must meet the basic eligibility for HAMP to be eligible for HAFA. That is, the property must be their primary residence, their outstanding loan balance must not exceed $729,750, their total house payment (principal, interest, taxes and insurance plus any homeowners' association dues) must exceed 31% of their gross monthly income and they must have a documentable hardship that is, or will, cause default.
HAFA Is Not for Strategic Defaulters
Borrowers must demonstrate a hardship that causes them to be unable to continue to make their mortgage payments. If you can afford your mortgage but choose not to pay, you don't get to walk away with HAFA and sidestep deficiency judgments. In addition, HAFA is only for those with clear title to their homes. If there is a tax lien, judgment lien, mechanic's lien or similar encumbrance on your property, it is not eligible for HAFA.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.