Short Sales & Federal Loan Modification

HAMP – You have heard of “HAMP” (the Obama Administration’s Home Affordable Modification Program), the details of which canbe read by clicking HERE.  Also see the footnote on HAMP below[i]

HAFA – The HAMP program now has a supplement to address short sales.  The Supplemental Directive 09-09 provides guidance to lenders on the Home Affordable Foreclosure Alternatives Program (in other words short sales) which is known as “HAFA” and its details can be read by clicking HERE.

Effective Date – HAFA is effective April 5, 2010, (but participating lenders may elect to implement HAFA prior to this date)

General Terms: 

  • Help
    If your home owner would like to speak with a counselor about this program, call the Homeowner’s HOPE™ Hotline 1‐888‐995‐HOPE (4673). The Homeowner’s HOPE™ Hotline offers free HUD‐certified counseling services and is available 24/7 in English and Spanish. Other languages are available by appointment.
  • Short Sale Agreement
    The HAFA Short Sale Agreement or” SSA,” Exhibit A, pg. 16 of the Directive  outlines the roles and responsibilities of the servicer and borrower in the short sale listing process and provides key marketing terms, such as a list price or acceptable sale proceeds and the duration of the SSA.
  • Price   
    Allows the borrower to receive pre-approved short sale terms prior to the property being listing.
  • Commission  (Read Carefully)
    Commission is semi-protected.  The Seller cannot earn a commission, nor can a Buyer.  It does prohibit the reduction in the real estate commission agreed upon in the listing agreement, but also allows the Lender to “retain vendors to assist your listing broker with the sale, and this vendor must be paid ____% [or $____] from the commission.”  So ensure you look over the Short Sale Agreement between the Lender and the Seller to know what this cost is.  Supplemental Directive Page A-5.
  • Release of Liability
    Requires that borrowers be fully released from future liability for the debt.
  • Release of 2nd Deed Liability
    This section is called the “Investor Reimbursement for Subordinate Lien Releases,” and declares that lenders may pay up to a total of up to $3,000 in short-sale proceeds to subordinate lien holders (2nds), or allow payment of up to $3,000 to subordinate lien holders.  Subordinate lien holders that receive payment must release their liens and waive all future claims against the borrower.
  • Cash For Keys
    Borrower entitled to an incentive payment of $1,500 to assist with relocation expenses to be reported on the HUD-1 Settlement Statement.
  • Arms Length Transaction
    Home cannot be sold to anyone who is related to the home owner nor to anyone who has a close personal or business relationship with the homeowner.  Seller cannot get any portion of commission (even if home owner is licensed).
  • 90 Day NO Flip
    Any buyer of the home must agree to not sell the home within 90 calendar days of the date it is sold.

HAFA Consideration/Requirements

  • Lenders will create a written policy for when it will offer the HAFA program to borrowers.
  • Borrowers must first apply for HAMP prior to the short sale HAFA being offered.
  • The property must be borrower’s principal residence.
  • Loan must be originated on or before January 1, 2009.
  • The mortgage must be delinquent or default is reasonably foreseeable.
  • Unpaid principal balance may not be more than $729,750 (different for duplexes)
  • The borrower’s total monthly mortgage payment must exceed 31 percent of the borrower’s gross income.

Time Frames:

  • SSA Offer to home owner by Lender.
    Lender to consider borrower for HAFA within 30 calendar days of the date the borrower requests a short sale.  Lender to notify the borrower in writing of the availability of HAFA option and allow the borrower 14 calendar days from the date of the notification to contact the servicer by verbal or written communication and request consideration under HAFA.
  • Days to Close Escrow.
    Home owner has120 calendar days from the date of the offer of HAFA to home owner to close escrow on the short sale.
  • Response Time By Lender.
    Offers submitted at the list price to the Lender (with a letter that the buyer is approved for a mortgage loan) will be responded to within 10 business days of lender’s receipt, provided the these documents are within the terms and conditions of SSA (and any other liens are released) the Lender will approve the sale.

 What Should You Do?

  • Work with your Seller to get the bank’s written policy of HAFA for your client’s particular lender.
  • Work with the 2nd Mortgage (if it exists) to determine if they are on board with HAFA.
  • Gain the pre-approved short sale figure from the Lender.
  • Read the SSA that the lender will be providing borrower,  Exhibit A, pg. 16 of the Directive. 
  • Ensure the Addendum to Sort Sale dictates that the terms of the Lender within the SSA are agreed to by the Buyer as to the 90 day “no flip rule.”

 

[i] Home Affordable Modification Program: Overview  The Home Affordable Modification Program is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Borrower eligibility is based on meeting specific criteria including:
1) borrower is delinquent on their mortgage or faces imminent risk of default
2) property is occupied as borrower’s primary residence
3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:

  • First, reduce the interest rate to as low as 2%,
  • Next, if necessary, extend the loan term to 40 years,
  • Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

Note: Servicers may elect to forgive principal under HAMP on a stand alone basis or before any modification step in order to achieve the target monthly mortgage payment.

The Home Affordable Modification Program includes incentives for borrowers, servicers and investors.