Will HAFA Improve The Short Sale Process?
On April 5th, the government implemented the Home Affordable Foreclosure Alternatives (HAFA) program, designed to standardize and streamline the short sale process. I'll give a brief overview of the program, along with some additional comments (and opinions). The information here includes revisions to the program that were released on March 26th.
HAFA is an extension of HAMP (Home Affordable Modification Program). The HAMP program was a major failure, helping only a very small percentage of eligible borrowers. Out of 4 million eligible borrowers, the HAMP program has produced less than 70,000 permanent loan modifications to date. The problem with HAMP is that it was loosely written, so many banks made little effort to implement the program as it was designed. After reading and studying the 45-page HAFA Supplemental Directive, I think we're likely to see many of the same problems that people experienced with the HAMP program.
The HAFA program provides voluntary guidelines for lenders to streamline the short sale and deed-in-lieu of foreclosure process by offering financial incentives to loan servicers, investors, and borrowers. It establishes an acceptable sale price for the property prior to listing it for sale, allows up to 120 days to sell the property, sends the borrower off with $3,000 at closing, and pays the loan servicer $1,500 for processing the short sale. Sounds like a great deal, right? Well, don't get too excited yet.
To qualify, the loan must be a first lien mortgage originated before January 1, 2009 from a participating lender NOT owned or guaranteed by Fannie Mae or Freddie Mac. VA and FHA loans are also excluded. It is estimated that well over 50% of loans will not qualify for the HAFA program.
The HAFA program is effective from April 5, 2010 through December 31, 2012.
The borrower must meet the following eligibility requirements:
- The property is the borrower's principal residence;
- The mortgage is delinquent or default is reasonably foreseeable;
- The current unpaid principal balance is equal to or less than $729,750;
- The borrower's total monthly payment exceeds 31% of the borrower's gross income;
- If there is mortgage insurance on the loan, the mortgage insurer must approve;
- The borrower must be evaluated for a HAMP modification prior to being considered for HAFA. (In other words, you'll have to spend several months running in circles trying to get the bank to respond to a loan modification request, even if you know you'll be turned down.)
Prior to approving a borrower to participate in a HAFA short sale, the loan servicer will determine the minimum net sale proceeds that they'll accept. What's interesting is that there is nothing in the 45-page document that would prevent a loan servicer from establishing an unreasonable amount for the minimum sale proceeds. For example, the loan servicer can require the property to sell for 10% more than the estimated value and the borrower can't dispute it. While that is a bit extreme, the minimum sale proceeds through the HAFA program could be higher than what they would accept on a traditional non-HAFA short sale.
Once a minimum amount is set by the loan servicer, the borrower signs a Short Sale Agreement (SSA), and a real estate agent markets the property and procures a buyer.
A Request for Approval of a Short Sale (RASS) is submitted with the buyer's offer, and within 10 days, the loan servicer must approve or reject the proposed sale. However, while 10 days may seem like a great timeframe for short sale approval, it could take up to three or four months to get to this point. Also, if the loan servicer is unable to comply with the 10 day timeline, they can just reject the offer and make up a reason like "insufficient information available". They're supposed to approve the sale if it meets the minimum net sale proceeds that they had previously set, but they'll find loopholes to get around it. Trust me, they will.
During the term of the SSA, the borrower may be required to make monthly payments of up to 31% of their gross monthly income. Since this would be less than the full payment amount, the loan servicer can still report the payments as late on your credit report.
If a short sale cannot be completed within 120 days, the borrower will be required to transfer the property to the bank via a deed-in-lieu of foreclosure (DIL). So if the buyer's financing falls through at the last minute and there's not enough time to procure a new buyer, the bank could require the borrower to sign the property over to them without the additional time and legal fees necessary for the standard foreclosure process. Sounds like a great deal for the bank.
Things start to get complicated is when there is more lienholder involved. For a short sale to be approved, any subordinate lienholders (like a second mortgage) must agree to a payoff of no more than 6% of the unpaid principal balance (up to an aggregate of $6,000 for all subordinate lienholders) in exchange for a lien release and full release of borrower liability. In other words, if there's a $30,000 second mortgage, the second lienholder will have to agree to a payoff of $1800 and forgive the borrower of the remaining deficiency according to HAFA. This could kill a lot of HAFA short sales with second mortgages, as many second lienholders won't agree to those terms. The HAFA program only applies to first mortgages, so second mortgage lenders are not required to comply with the HAFA guidelines.
While some of the intentions behind the HAFA program may be good, the program is not likely to see much success. Some borrowers may benefit from doing a short sale through the HAFA program, but most borrowers are likely to see better results through a traditional (non-HAFA) short sale. The HAFA program doesn't necessarily change the way short sales are done--It just offers another option for those who may qualify.
Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.
Considering a short sale? Check out this Short Sale FAQ first.
Copyright (c) 2010 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).