NEW SHORT SALES RULES AND REGULATIONS TO BEGIN APRIL 5, 2010
When the U.S. Treasury Department promulgated H.A.M.P. (Home Affordable Modification Program) there were high hopes and expectations that eligible homeowners, who could not make their mortgage payments due to high interest rates, adjustable rate loans, reduced income, etc. would be able to begin a process to modify their mortgages. HAMP was intended to reduce the number of at-risk homeowners losing their homes in foreclosure and offer new “modified” terms, thereby allowing people to keep their property. Unfortunately, a very small percentage of eligible homeowners were successful in getting their loans modified after as much as a year of negotiations with their lenders.
The Treasury Department then came up with an answer in response to the poor success rate of H.A.M.P. Thus H.A.F.A. was born. The Home Affordable Foreclosure Alternative, known as H.A.F.A. is actually part of H.A.M.P. and it provides financial incentives to servicers and borrowers who are able to complete a short sale or Deed in Lieu of Foreclosure (DIL) to avoid a foreclosure on an eligible loan under H.A.M.P.
We have all heard horror stories of properties being vandalized and stripped clean by intruders into vacant homes or damage done by the homeowners themselves who feel they have nothing to lose. The short sale and DIL options help to shorten the process and avoid foreclosure which is a lengthy and expensive procedure. The time a property remains vacant is also reduced as the homeowner will stay in the property until the closing or until the DIL is received by the lender.
WHO PARTICIPATES IN HAFA?
All first lien mortgage loans that are guaranteed by Fannie Mae or Freddie Mac are automatically included in this program. In addition, about 100 non GSE (Government Sponsored Enterprise) servicers have signed up and are bound by the new rules and regulations. These non GSE servicers were required to sign a Servicer Participation Agreement (SPA) binding them to the rules. How does this affect the homeowner in danger of losing their home? Many people in pre-foreclosure and foreclosure will be eligible to take advantage of H.A.F.A.
SHORT SALE RULES
There are several important changes in the new HAFA short sale rules. These changes are of a substantial benefit to the homeowner. Some of them are as follows:
- The primary lender cannot require a cash contribution from the homeowner, nor can the lender require that the owner sign a promissory note at the closing. Most important, the lender cannot pursue the homeowner for a deficiency judgment.
- The homeowner may now receive pre-approved short sale terms prior to the property being listed.
- Servicers are advised not to reduce the realtor's commission from what was agreed to in the listing agreement (6% is considered a fair commission under H.A.F.A.)
- The servicer must use standardized forms, processes and timeframes.
- Provides financial incentives to the homeowner, servicers and investors. Prior to April 5, 2010, the Seller was prohibited from walking away with any money from a short sale transaction. Under the new rules, the Seller is allowed $3,000.00 for “relocation expenses”. This sum will be deducted from the payoff amount to the short sale lender and given to the homeowner.
REQUIREMENTS FOR ELIGIBILITY UNDER HAFA
- Property must be the homeowner’s principal residence
- The mortgage loan is a first lien on the property and originated before January 1, 2009.
- The mortgage is delinquent or default is reasonably foreseeable.
- The current unpaid principal balance of the mortgage is equal to or less than $729,750.00-one unit homes (higher amounts on 2-4 unit dwellings)
- The borrower’s total monthly mortgage payment exceeds 31 % of the borrower’s gross income.
- Must be an “arms length transaction”. Purchaser and Seller may not be related or engaged in a common business enterprise.
- Purchaser may not sell the property within 90 days of closing (anti-flipping)
EVERY POTENTIALLY ELIGIBLE BORROWER MUST BE CONSIDERED FOR HAFA BEFORE THE LOAN IS REFERRED TO FORECLOSURE OR THE SERVICER ALLOWS A PENDING SHERIFF’S SALE. THIS IS A REQUIREMENT OF HAFA ON ALL PARTICIPATING SERVICERS.
DEED IN LIEU OF FORECLOSURE (DIL)
In a DIL, the homeowner will voluntarily transfer title to the property to the servicer in full satisfaction of the total amount due on the first mortgage. The homeowner must provide “clear” and marketable title free of any other liens and encumbrances. A servicer may require the homeowner to make an attempt to sell the property as a short sale first, before accepting a DIL. As with the short sale, the servicer may not request any money from the homeowner, nor may they require that a promissory note be signed. Finally, as with the short sale, the servicer may not pursue a deficiency judgment against the homeowner.
