The number one question we are asked right now is about the HAFA program (Home Affordable Foreclosures Alternatives) – which went into effect on April 5th – and how it is going to affect short sales. So here is my quick summary:
First some background: in 2009 the Treasury Department came up with the HAMP program (Home Affordable Modification Program), which, if you read the news, has not been very effective. And since these loan modifications haven’t been too successful, the government decided to come up with a new program… HAFA.
The purpose: it is supposed to help those homeowners who do not qualify for the HAMP sponsored loan mod and provide incentives to the homeowner & lender if instead they do a short sale, or a deed-in-lieu of foreclosure.
So Just Who Qualifies & What Are the Requirements (for both HAMP/HAFA)?
- This is only for principal residences (although it is okay if homeowner had to move away for a job)
- The principal loan balance cannot exceed $729,750
- The homeowner must be delinquent or soon will be (a reasonably foreseeable default)
- It is only for those loans that were originated before 2009
- Homeowner’s payment exceeds 31% of their gross income
The Facts: What’s Good, What’s Neutral and What’s Bad
- Requires that the homeowner be fully released from future liability (Good!)
- Does not allow cash contributions, promissory notes, or deficiency judgments. (Very Good!)
- Gives the homeowner $3000 for relocation assistance (Excellent!)
- Servicer has 10 days to approve or disapprove. (This is good … if they do it.)
The Good –
- Gives the servicer $1500 for administrative & processing costs
- Gives the investor (who owns the mortgage) up to $2000 for allowing proceeds from the short sale to be shared with any
2nd lien holders.
- Gives the 2nd lien holders up to $6000 to be shared amongst them.
- No additional payments by the agent or borrower are allowed to go to the 2nd lien holder.
The Neutral –
- Homeowners who are not making payments must start making payments of 31% of their gross income or property goes to deed in lieu.
- The bank determines the sales price and the real estate broker has no control over pricing.
- The bank can force a deed in lieu if property does not sell at ITS price in 120 days, even if the homeowner is not in foreclosure.
- It covers very few loans. Not Fannie, Freddie, FHA and VA.
- Homeowner must negotiate their own junior liens for a maximum payment of $3000 per lien, not to exceed $6000 total.
The Bad –
So Will It Work?
There are some problems that may significantly affect how successful it will be:
- Homeowners are expected to start making payments of 31% of their gross income. The question is… How likely is it that a homeowner will begin to make payments just to short sale their home?
- The government HAFA program requires the homeowner to sign off on a deed-in-lieu in advance. And this is not often disclosed!
- Homeowners must negotiate their own junior liens … and the maximum amount that can be paid to a 2nd lien holder is $3000. So there are two questions here… Are most homeowners capable of negotiating their own junior liens?, AND (more importantly!) If the 2nd lien holder is owed $100,000 or more, will $3000 satisfy them?
- Lastly, the pie in the sky statement… Servicer has 10 days to approve or disapprove. Hmm… in our experience, most of the servicers don’t seem to have their act together enough to work that quickly!!
As for how this will affect our business… I don’t think too much will change. This is a voluntary program and to date out of the thousands of lenders out there, only about 115 have signed up. Also, there are a lot of homeowners that don’t qualify for this program, and junior lien holders may not want to play if they think they can get more than the measly two to three thousand they would be required to take.
Most likely, HAFA will probably be just as effective as the HAMP program – some homeowners will be helped, the majority won’t. But the jury is still out and we will have to wait to see if HAFA becomes another “4 letter word” in our vocabulary.