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Important Note: With regards to HAFA, every servicer can make their own basic guildelines. The information provided below is merely guidance provided by the treasury.
On November 30 2009, the Treasury Department released it's guidelines to improve and standardize the short sale process called "Home Affordable Foreclosure Alternatives - Short Sale and Deed-in-Lieu of Foreclosure". While the guidelines can be read in their entirety on the Making Home Affordable website, here are the program highlights:
- This Making Home Affordable " program does not go into effect until April 5, 2010 and expires December 31, 2012.
- The short sale and deed-in-lieu standards only apply to first mortgages where the investor is NOT Freddie Mac, Fannie Mae, FHA, or the VA. Other investors may opt-in to the program but are not required to. (Ok, behind every mortgage is a servicer and an investor. If you obtained your loan through Bank of America, chances are Bank of America is only the servicer of the loan and not the investor of the mortgage. For Conventional mortgage, the servicer could be Freddie Mac, Fannie Mae, or a private investor like a mortgage-backed security, or even another bank.)
- The property must be the borrower's principal residence.
- The mortgage (remember first mortgage only) must have been originated on or before January 1, 2009.
- The borrower (seller in the case of a short sale) must be behind on their mortgage or the default is reasonably foreseeable (i.e. I lost my job and I can only live off on my savings for two months).
- The current unpaid principal balance of the loan must equal or less than $729,750 (this amount increases for multi-family residences).
- The borrowers total monthly mortgage payment must exceed 31% of the borrower's gross income.
Banks will begin reaching out to borrowers
Borrowers in default on their mortgage will be notified by their mortgage lender that they be eligible to participate in the "Home Affordable Financing Alternatives" program. If the borrower fails to respond to the bank's suggestion within 14 calendar days, the bank is under no obligation to extend the offer. Therefore, sellers in trouble will want to contact their bank to see if they qualify for the program. A mortgage representative will pre-qualify borrowers verbally and if eligible, will request supporting information from the borrower. The bank will also determine the value at the time of pre-qualification at no charge to the borrower unless the borrower fails to complete the program. Currently, the valuation of the property (either through a broker-price-opinion or appraisal) is not completed until after the home is listed, contract is received, and hardship is evaluated.
Changes to the Short Sale Process
In a short sale, the bank allows the borrower to list and seller the mortgaged property with the understanding that the proceeds from the sale may be less than the total amount due on the mortgage. Changes, additions, enhancements to the short sale process include:
- A standardized Request for Approval of a Short Sale and Short Sale Agreement form will be issued to the borrower (samples of which can be viewed here). It will outline the marketing terms, the listing price as determined by the investor's guidelines, and the responsibilities of the borrower.
- The short sale agreement is only good for 120 days but may be extended for total term of 12 months.
- The property must be listed by a local licensed real estate professional.
- The Short Sale Agreement will specify the the list price or the acceptable sale proceeds before the home is listed (BIG change from the way things are handled now).
- Real estate agent's commissions will be capped at 6% for all sides involved and that includes any fees paid to a third-party negotiator.
- If successfully closed, the borrower will be released from all liability of repayment from the first mortgage debt (and this includes loans with mortgage insurance). No more promissory notes!
- Subordinate liens (2nd mortgages), in the order that they are filed, will receive a maximum of up to 3% of their unpaid balances; up to a total of $3,000. The Treasury Department will offer additional incentive of up to $1,000 to the subordinate liens for their release of the deed.
- The borrowers mortgage will be modified to 31% of their gross monthly income during the term of the short sale. If the borrower fails to pay during this modification period, their short sale agreement may be terminated.
- If the borrower abides by the terms of the Short Sale agreement, the bank WILL NOT foreclose on the home.
Short Sale "Investors": Your Opportunities are Eliminated. A couple of years ago, real estate investors discovered that they could put a short sale home under contract and then while they negotiated the sale with the bank, sell the home to a buyer at a higher price. Once the short sale was approved, they would close on the home in the morning and their buyer would close on the home in the afternoon. Their tenure of ownership would last a mere few hours and for the trouble, they could make 3-10% of the market value of the home. If they aren't successful, they let the home go into foreclosure. Under this program, the buyer of the home may not re-sell the home for 90 days after closing.
Sellers are FINALLY Compensated
Borrowers who participate with the terms of the short sale agreement will receive $3,000 at closing as a relocation incentive. Currently, borrowers in a short sale may not receive any money at closing under any circumstances.
Obligations of the Seller
- Provide all information and sign documents required to verify program eligibility.
- Cooperate with your real estate agent to actively market the property and respond to bank inquiries.
- Maintain the interior and exterior of the property in a manner that will mean a quicker, higher priced sale.
- Work to clear any liens that may prevent title conveyance.
- Make the monthly modified mortgage payment in the Short Sale Agreement, if applicable.
How you can get kicked out of the program
- Your financial situation improves or the borrower brings the account current or otherwise pays the account in full
- Your real estate agent fails to act in good faith in listing, marketing, and/or closing the sale or violates the terms of the Short Sale Agreement
- The condition or value of the property changes significantly
- The bank discovers evidence of fraud or misrepresentation
- The borrower / seller files for bankruptcy and the Bankruptcy Court declines to approve the Short Sale Agreement
- Litigation is initiated or threatened that could affect the title to the property
- The borrower fails to make the monthly modified mortgage payment
Warning: if you are kicked out of the program, you may be held responsible for the costs associated with the property valuation and servicer fees.
Short Sale Approvals will be within 10 business days.
Once a contract is received on the home, the listing agent will have 3 business days to submit the file to the bank for final approval. Since all of time consuming work is done up front, the bank will be able to approve or disapprove the sale within 10 business days. Sure beats the 6+ months most sales are taking these days. Additionally, the sales will be AUTOMATICALLY approved if the net sale proceeds are equal or exceed the minimum net determined in the Short Sale Agreement and the other terms have been met. Real estate agent's commissions not be reduced below the amount set-forth in the Short Sale Agreement (6%).
The bank will still specify when a closing will occur however the bank must allow the buyer at least 45 days from the approval to close the file.
Deed-in-Lieu of Foreclosure
Similar to the short sale process, a deed-in-lieu occurs when a seller sells the deed of their home to their mortgage lender instead of facing a foreclosure. A deed-in-lieu agreement can be viewed here. Changes to this process include:
- Borrower will have at least 30 days to vacate the property from the Deed-in-Lieu agreement date
- Borrowers will be able to receive a $3,000 relocation incentive for participating in the program
- The home is able to be conveyed free and clear of all other liens
- The bank may require the borrower / seller to attempt the short sale before accepting a deed-in-lieu. Some Short Sale Agreements may default to a Deed-in-Lieu agreement if the home fails to sell through a short sale.
Changes on How Short Sales and Deed-in-Lieu's are reported to the Credit Bureau's
When a seller / borrower agrees to a Short Sale Agreement or Deed-In-Lieu agreement, it will be reported at that time to the credit bureaus. Successful short sales will now report on your credit reports as "UA: account paid in full for less than the full balance" while Deed-in-Lieu sales will record as "89: deed-in-lieu of foreclosure on a defaulted loan."
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Topics
HAFA: Home Affordable Foreclosure Alternative
Promissory Notes
Active-Duty Military: Avoid Foreclosure through the Soldiers and Sailors Act
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