New HAFA Regulations Explained

In the beginning of April 2010 the Obama administration has implementing new regulations regarding defaulted FHA backed mortgages. These changes are important for both buyers and sellers to note, as they have significant implications. In this article I will try to present a clear picture of the changes, and highlight how those may effect you.

In the first months of this administration structure and funds have been allocated as part of the Home Affordable Modification Program (HAMP) in order to help people who defaulted on their mortgages to modify their loans for a temporary reprieve. Now the administration has turned to a different tool. Homeowners who owe more on their property than its market value, and who can show hardship (loss of income, serious health issues, divorce, etc.), have had one major option to avoid foreclosure or bankruptcy, the short-sale. This little known transaction has become fairly well known in the last couple of years due to the high rates of loan defaults.

A short sale is a property sale where the offer is being presented to the lender (mortgagee) for approval. If the bank deems the offer as reasonable, taking into account the potential expenses the lender may incur by hanging on to the property, they often will reduce the due amount to correspond to the offer amount, minus the auxiliary transaction costs. (Payoff to Lender = Sale Price - Transactional Costs)

What has always been the problem with short sales, is the fact that there is no certainty that the bank will indeed approve the sale up until the bank has processed it, following the offer submission. This means that the Realtor has to estimate a price the bank would be likely to accept,and the offer has to ultimately come up to that threshold, for the short sale to be approved. If the lender/bank has not accepted the offer, this sets up a benchmark for the sale, and the pricing can be adjusted appropriately for the next round in the hopes of getting it through. The problem with that is that months pass with no guarantee of acceptance. This is bad for the buyer, bad for the seller, and bad for the professionals involved in the process (Realtors, attorneys).

My understanding is that the main reason banks do not provide this information ahead of time, is that they bank does not want to undercut themselves. Publishing the threshold would potentially set a low boundary for the sale, and there would be no incentive for the listing Realtor and the seller to list it any higher than the minimum price that would get it through.

On the 5th of April 2010, the administration's HAFA (Home Affordable Foreclosure Alternatives) program came into effect. This is an expansion of the Make Home Affordable program, and is designed to improve the process of foreclosure alternatives, primarily short sales. In the event the loan does not qualify for a loan modification, loan services will than move to a streamlined short sale strategy.

The idea behind HAFA is to incentivize more homes to be short sold rather than ending as foreclosed. Foreclosed properties are known to lower the value of surrounding properties by up to 9% (based on national statistics), causing a chain reaction of upside down mortgages and foreclosures in the neighborhood. To the lender there is no joy in acquiring foreclosed properties either, as they look bad on the books, and in general allow the lender to recoup on average only 30% of the debt as opposed to 60% in a short sale.

HAFA will aim to improve the process by offering incentives for lenders, as well as defaulting home owners to follow the HAFA process.The lenders and servicers are mandated to come up with a streamlined process that will speed up many short sales and ensure a higher rate of success.

Borrowers will receive pre-approved short-sale terms before listing the property, including either a list price approved by the servicer or the acceptable sale proceeds, according to the U.S. Treasury Department. That way, sellers know what lenders will accept before listing the property.

There's a set time line, with deadlines for lenders and sellers to keep the short-sale process moving

At the completion of a sale, borrowers may get up to $3,000* for relocation expenses, and servicers may receive compensation of up to $1,000. Up to $3,000 of proceeds are available to distribute to subordinate lien holders, making it possible to compensate the lenders of second mortgages.(* note that the relocation reimbursement may be taxable)

In addition the lender will pay many of the upfront expenses associated with the short sale process.

The following are triggers that should initiate a HAFA short sale:

1. The borrower (homeowner) doesn't qualify for HAMP loan modification plan
   
2. The Borrower was unable to successfully complete HAMP trial
3. The borrower was delinquent on the HAMP modification plan
   
4. The homeowner needs to move to follow a new job and wants a short sale
   

Not everyone will be eligible for a streamlined short sale under HAFA however. For example the borrower will need to live in the property as a primary residence, or would have had to move out in the last 90 days before applying before relocating for a new job. It is therefore important to contact the lender to examine qualification.

Please note that I write this for your educational benefit. I am not an attorney, nor a Mortgage broker, and thus I am not attempting to present legal or financial council. If you have questions please contact me and I will be happy to direct you to the appropriate competent expert.

Read more about HAFA.