In early 2009, the National Association of Association of Real Estate AgentsS® (Association of Real Estate Agents) urged the U.S. Treasury Department, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac to improve the short sales process.
Association of Real Estate Agents’s concerns were first addressed on May 14, 2009, when the Obama Administration announced the outline of a program to provide incentives and uniform procedures for short sales and deeds-in-lieu of foreclosure (DIL) under the Making Home Affordable Program.
The Obama Administration released guidelines and uniform forms for its Home Affordable Foreclosure Alternatives Program (HAFA) on November 30, 2009 and released an updated version on March 26, 2010. April 5, 2010 was the effective date for the program.
Modified HAFA rules for loans owned or guaranteed by Fannie Mae or Freddie Mac were still being developed as of April 28, 2010 (check www.realtor.org/shortsales for updates). HAFA does not apply to FHA or VA loans.
HAFA is a program primarily designed for homeowners who are unable to stay in their home even with a loan modification under the Home Affordable Modification Program (HAMP). Under HAFA, homeowners may be able to avoid a foreclosure by selling the home as a "short sale" (where the value of the home is less than the remaining amount of the mortgage) or by transferring title to the lender through a process called a "deed-in-lieu of foreclosure."
Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.
Uses borrower financial and hardship information already collected under HAMP.
Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds and acceptable closing costs).
Requires borrowers to be fully released from future liability for the first mortgage debt and, if the subordinate lien holders receive an incentive under HAFA, those debts as well (no cash contribution, promissory note, or deficiency judgment is allowed).
Uses a standard process, uniform documents, and deadlines.
Provides financial incentives: $3,000 for borrower relocation assistance; $1,500 for mortgage servicers to cover administrative and processing costs; and up to a $2,000 match for mortgage investors for allowing a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders (up to 6 percent of the remaining balance of each junior lien).
Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.
The program sunsets on December 31, 2012.
Determination of Eligibility and Notification
Servicers must consider HAMP-eligible borrowers for HAFA within 30 calendar days after the borrower does at least one of the following:
Does not qualify for a HAMP trial period plan
Does not successfully complete a HAMP trial period plan
Is delinquent on a HAMP modification (misses at least 2 consecutive payments)
Requests a short sale or DIL
If the servicer determines a borrower is eligible based on its written policy and has not already discussed a short sale or DIL with the borrower, it must notify the borrower in writing of these options and give the borrower 14 calendar days to respond, orally or in writing. If the borrower does not respond, that ends the servicer’s duty to give a HAFA offer. If the borrower asks for consideration but a short sale or DIL is not available, the servicer must inform the borrower with an explanation and provide a toll-free number.
Short Sale Agreement
If the borrower is interested in a short sale, the servicer fills out the Short Sale Agreement (SSA) and sends it to the borrower. The borrower has 14 calendar days from the date of the SSA to sign and return it to the servicer. The real estate broker also must sign the SSA. The SSA must give the borrower an initial period of 120 calendar days to sell the house (servicers may extend up to a total of 12 months, if agreed to by the borrower).
Within 3 business days of receiving an executed sale contract, the borrower (or real estate agent) must submit a completed Request for Approval of Short Sale (RASS) to the servicer, including
a copy of the sale contract and all addenda
buyer documentation of funds or pre-approval/commitment letter from a lender
all information on the status of subordinate liens and/or negotiations with subordinate lien holders.
Within 10 business days after the servicer receives the RASS and all required attachments, the servicer must approve or deny the request and advise the borrower (with a statement of the reasons in the case of disapproval).
Closing and Lien Release
The servicer may require the closing to take place within a reasonable period after it approves the RASS, but not sooner than 45 calendar days from the date of the sales contract unless the borrower agrees.
The servicer must follow local or state laws to time the release of its first mortgage lien. If local or state law does not govern, the servicer must release its first mortgage lien within 30 business days. Investors must waive rights to seek deficiency judgments and may not require
a promissory note for any deficiency. These rules also apply to junior lien holders receiving incentives.
Association of Real Estate Agents FAQs
HAFA is a complex program with nearly 50 pages of guidelines and forms. To help you better understand the process, Association of Real Estate Agents has prepared some frequently asked questions that address the basics. For more information on HAFA and more detailed Association of Real Estate Agents FAQs, please visit www.realtor.org/shortsales
Who is eligible for HAFA?
The borrower must meet the basic eligibility criteria for HAMP:
Principal residence (including certain vacant properties for borrowers who recently moved at least 100 miles for employment and meet program requirements)
First lien originated before 2009
Mortgage delinquent or default is reasonably foreseeable
Unpaid principal balance no more than $729,750 (higher limits for two- to four-unit dwellings)
Borrower’s total monthly payment exceeds 31% of gross income
How is the program being implemented?
Supplemental Directive 09-09 (revised March 26, 2010) gives servicers guidance for carrying out the program. Check www.realtor.org/shortsales for future updates.
A short sale agreement (SSA) will be sent by the servicer to the borrower after determining the borrower is interested in, and eligible for, a short sale and the property qualifies. It informs the borrower how the program works and the conditions that apply.
After the borrower contracts to sell the property, the borrower submits a "Request for Approval of Short Sale" (RASS) to the servicer within 3 business days for approval. If the borrower already has an executed sales contract and asks the servicer to approve it before an SSA is executed, the Alternative RASS is used instead. The servicer must still consider the borrower for a loan modification.
What are the steps for evaluating a loan to see if it is a candidate for HAFA?
1. Borrower solicitation and response
2. Assess expected recovery through foreclosure and disposition compared to a HAFA short sale or deed in lieu of foreclosure (DIL)
3. Use of borrower financial information from HAMP
4. Property valuation
5. Review of title
6. Borrower notice if short sale or DIL not available (to borrowers that have expressed interest in HAFA).
What are the HAFA rules regarding real estate commissions?
The servicer specifies the amount of commission in the Short Sale Agreement (SSA) as a "reasonable and customary" closing cost. The borrower and the prospective real estate broker may negotiate with the servicer on the terms of the SSA, including the commission.
There is a different rule if the borrower submits an executed sales contract to the servicer for approval before a SSA is executed. In that case, the sales contract is submitted to the servicer with an Alternative Request for Approval of Short Sale. The amount of the commission in that case is the amount negotiated in the listing agreement, not to exceed 6 percent.
Neither buyers not sellers may earn a commission in connection with the short sale, even if they are licensed real estate brokers or agents. They may not have any side deals to receive a commission indirectly.
What else should I know?
The deal must be "arms length." Borrowers can’t list the property or sell it to a relative or anyone else with whom they have a close personal or business relationship.
The amount of debt forgiven might be treated as income for tax purposes. Under a law expiring at the end of 2012, however, forgiven debt will not be taxed if the amount does not exceed the debt that was used for acquisition, construction, or rehabilitation of a principal residence. Check with a tax advisor or the IRS.
The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment, which may hurt credit scores.
Buyers may not reconvey the property for 90 days (no "flipping").
On April 5, 2010, the U.S. Treasury Department initiated a new federal program known as HAFA (Home Affordable Foreclosure Assistance Program.) With a new Supplemental Directive issued December 28, 2010 for changes taking place February 1st, 2011; this program provides vital protections for the defaulting homeowner.
With either the HAFA short sale or a deed in lieu of foreclosure, the servicer may not require a cash contribution or promissory note from the borrower and may not pursue a deficiency judgment against the borrower. HAFA is not available to all borrowers and it's important that homeowners educate themselves in order to make an informed decision. Here are some facts regarding the HAFA program:
- As of August 1, 2010, Fanny Mae and Freddie Mac have rolled out their own HAFA-like programs, which are very similar to the non-GSE mortgage (Government Sponsored Enterprises) guidelines.
- HAFA does not apply to loans insured by Fannie Mae or Freddy Mac, but now these loans have their own HAFA-like program, very similar to the non-GSE guidelines.
- HAFA does not apply to FHA or VA loans. FHA and VA have their own short sale program, which is substantially different from the HAFA guidelines.
- HAFA is not a law or legislation. HAFA is simply written guidelines for the banks to follow. It is not mandatory, and bank participation is voluntary. However, banks which have accepted TARP funds and are participating in the HAMP program must also offer the HAFA alternative. For a list of banks and servicers who are in the HAMP and HAFA programs.
- While many bank servicers have agreed to participate with HAFA, it’s important to understand that the bank servicer typically does not own your loan. It is ultimately the decision of the investor who does own your loan whether or not to participate with HAFA. Just for clarification, your loan servicer is the financial institution that collects your monthly mortgage payments and has responsibility for the management and accounting of your loan. (Servicers are typically banks such as Bank of America and Wells Fargo). The majority of residential mortgages are owned by groups of investors (i.e. Fannie Mae, Freddy Mac) and these investors hire loan servicers (banks) to collect the money from homeowners and send it to the investor.
- If you have a second mortgage, these lenders are not obligated to participate with HAFA, and to what degree. The maximum allowed payoff for all junior or subordinate liens is $6000. Jr. Liens are a particularly tricky issue to negotiate during a short sale, and a primary reason to pursue a short sale in Utah.
- Jr. Liens are now required to give a lien release and full release of borrower liability in return for payment under the program.
- If the 2nd lien is with the same bank as the 1st, the 2nd will probably cooperate with the HAFA program guidelines.
- Banks can require the borrower to pay all - or - a portion of the mortgage payment during the HAFA approval process. This is not the case with a non-HAFA short sale.
- HAFA does not apply for investment properties, vacation homes, commercial properties, or tenant occupied properties.
- If you have moved out of the home for less than a year, and have not purchased another property, you may still be eligible for the HAFA program.
- A HAFA short sale does not stop the foreclosure process vs. a traditional short sale, where the foreclosure may be stopped with an executed contract between buyer and seller.
- If the home has already been scheduled for a Trustee (Foreclosure) Sale, you cannot start a short sale under the HAFA program. This is not the case with a non-HAFA short sale.
- You must live in the house, have bought it before January 1, 2009, and owe less than $729,750.
- Under the revised guidelines coming into effect February 1st, there is no longer any income qualifying hardship for consideration for HAFA short sale, or a need to provide IRS form 4506-T, request for tax filing information. The borrower must provide a signed hardship affidavit and fill out an RMA After requesting a HAFA short sale, the homeowner has 14 days to get the information package back to the bank, or the bank no longer has to consider a HAFA short sale.
- Under the revised guidelines, the bank no longer has the right to evaluate the property and deny a short sale under net present value formula.
- The servicer must complete and send the short sale approval to the borrower within 30 calendar days.
- Under the revised guidelines, within 30 calendar days of receipt of an executed sales contract and request for the HAFA short sale, the servicer must communicate approval or disapproval of the sale, or provide a counter offer.
- The short sale agreement may provide an option for the borrower to continue to occupy the property on a rental basis (deed-for-lease) or provide an opportunity for the borrower to repurchase the property at some future time. Such transactions are eligible for financial incentives under HAFA, so long as all other program requirements are met. At the discretion of the servicer in accordance with investor guidelines, the borrower relocation incentive may be paid either upon the successful closing or at a future time when the borrower vacates or repurchases the property.
While the HAFA program is a good start the fact remains that not all borrowers or their mortgages will qualify for HAFA (based upon the above criteria.) Banks are struggling to implement HAFA, Additionally, the HAFA program is a national program, with the same criteria being applied to all cities. HAFA does not take into consideration the specific needs of Utah residents. In addition, many borrowers invested in rental homes during the upturn, and HAFA does not address this issue at all.
Previous programs offered by the federal government include the HOPE NOW and MAKING HOME AFFORDABLE programs which were failures by any objective measure. These programs promised homeowners that their mortgage could be modified. Additionally, these programs promised families that they could "keep their homes." We now know that less than .03% of residential mortgages were actually modified under the HOPE program, and these programs were a disaster for homeowners.
The government's primary concern is to fix the economy, and the banks primary objective is to fix their own financial situation.