By Harvey S. Jacobs July 10, 2010
The federal government’s Home Affordable Foreclosure Alternatives program, or HAFA, announced in April, may actually achieve some success where its predecessors have failed.
What HAFA will not do is keep homeowners in their homes. It’s designed to make the process for getting out of an unaffordable home, without going through foreclosure, more predictable and efficient for all parties involved in the deal.
The reason for optimism is that HAFA removes several impediments to the widespread use of prior programs and provides incentives to all of the players in the workout mess.
For example, homeowners can receive $3,000 toward relocation costs, mortgage investors and loan servicers can receive incentives of $1,500 per loan, real estate agents’ undiscounted commissions are honored, and even junior lien holders can receive up to $6,000 in exchange for releasing their liens and agreeing not to pursue borrowers for deficiency judgments.
Formerly, the short-sale approval process was purely hit or miss. The homeowner and the real estate agent would list the home at whatever price they thought it would sell for. Then, once they obtained a bona fide buyer, they would submit the purchase contract to the lender for approval.
The lender could take whatever time it needed to approve or deny the request. This process often took many months and was repeated any number of times. Lenders would attempt to “negotiate” reductions in commissions and other closing costs in exchange for their approval.
Most borrowers were not willing to wait endlessly, and most real estate agents were not willing to sell the same home several times just to earn one reduced commission.
Once an approval was pried out of the lender, it often had unreasonably short deadlines, causing all parties to scramble. Buyers had to mobilize to obtain new loan approvals. Settlement attorneys had to expedite updated title searches, surveys or other lien searches and rush all parties to close before the short-sale approval deadline passed. It was a “hurry up and wait” scenario that pleased no one.
HAFA was created to provide a solution for homeowners who are not able to qualify for permanent loan modifications and conclude that they cannot afford to remain in their homes. HAFA provides a platform for the orderly short sale to proceed using standardized documents and enforceable deadlines. It also provides the way for homeowners to use a deed-in-lieu of foreclosure solution if they are not successful finding a short-sale buyer.
To qualify for a HAFA short sale or deed-in-lieu, the mortgage must be for a borrower’s principal residence; the loan balance may not be more than $729,750; the borrower must have incurred some hardship such as a medical emergency or a drastic reduction in income; the loan must have closed before Jan. 1, 2009, and first-mortgage payments (including property taxes, insurance and mandatory homeowners or condo fees) must be more than 31 percent of current gross household income.
For a deed-in-lieu arrangement, borrowers must also be able to deliver clear and marketable title to the home, free and clear of all liens or encumbrances and leave the home in “broom clean” condition. Homeowners are given a minimum of 30 days to vacate the home from the date the short-sale agreement expires or the date of the deed-in-lieu agreement.
Since lenders’ participation in HAFA is voluntary, not all loans will be eligible. But all loans owned or guaranteed by Fannie Mae or Freddie Mac are eligible for HAFA. You can see if your loan is eligible by contacting your loan servicer or by going to http://makinghomeaffordable.gov, which also lists the required documents.
Of the more important improvements HAFA brings to the industry is that it mandates the use of standardized documents and strict time frames. These documents can be downloaded from http://https://www .hmpadmin.com/portal/programs/foreclosure_alternatives.html.
To use HAFA, a borrower applies for relief using the Request for Modification and Affidavit RMA form. The lender has 30 days to respond to the request. If the lender approves, it will offer the homeowner a standard short-sale agreement setting forth the minimum sales proceeds that the lender will accept, taking into account closing costs, real estate commissions and expenses common in the local market. Borrowers have 14 days to accept or reject the short-sale agreement. If a borrower accepts, the real estate agent has a minimum of 120 days to actively market the home, but that marketing period can be extended to a full year if necessary.
This takes the enormous uncertainty out of the marketing process for real estate agents and buyers alike. The timetable becomes clear: Homeowners have three days from receiving a ratified contract to notify their lender and request short-sale approval. The lender has 10 days to confirm that the offer meets the short-sale agreement terms and conditions. If approved, the new buyer will have a minimum of 45 days to accomplish all the steps necessary to go to settlement. The new buyer will also need to agree not to sell the home for 90 days aftsettlement.
Other major HAFA improvements include participating lenders’ waiver of their right to pursue deficiency judgments against borrowers. Thus, if they are able to obtain and comply with a pre-approved short-sale agreement, borrowers can move on with their lives secure in the knowledge that their lender will not be chasing after them for a deficiency judgment. And under the Mortgage Forgiveness Debt Relief Act, the IRS will not treat this forbearance as taxable income.
Finally, HAFA prohibits participating lenders from completing the foreclosure process when HAFA deadlines are pending. (They may proceed with the foreclosure process but cannot complete it.) So homeowners can rest assured that while the process is pending, their home will not be pulled out from under them, at least not by their participating HAFA lender.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at (301) 417-4144, firstname.lastname@example.org or ask@theh