Short-Sales Just Got Easier
On April 5, the federal government officially inaugurated another acronym: HAFA, which stands for Home Affordable Foreclosure Alternatives and represents the latest attempt to deal with the housing crisis. As implied by the name, this program aims not to make mortgages more affordable for struggling homeowners, but simply to avert foreclosure. Towards this end, it will encourage short sales (a sale that is expected to net less than the unpaid mortgage balance) as a more palatable alternative.
Just like with its predecessor programs (HAMP, etc.), lender participation in HAFA is completely voluntarily. Instead of forcing participation (which would be unconstitutional), the government instead will try to encourage participation through incentive payments. Lenders will receive $1,500 for processing a short-sale, investors will receive up to $2,000, and second mortgage holders stand to get $3,000, a pittance relative to what they are owed in most cases, but better than the $0 that they would probably get in the event of foreclosure. Even borrowers (who in most cases require no incentive) are eligible for up to $3,000 in “relocation assistance.”
Before a homeowner can qualify for HAFA, he must first apply for a HAMP loan modification. Those who are rejected outright or miss payments (doesn’t this create a perverse incentive?!) will then become eligible for a HAFA short-sale. The borrower must also demonstrate that the mortgage is unaffordable (i.e. exceeds 31% of gross income) and that without lender intervention, loan default would be imminent. (In addition, the unpaid mortgage balance cannot exceed $729,500, the property must be a primary residence, and the mortgage must be owned by Fannie Mae or Freddie Mac).
Within 30 days of being denied a loan modification, the lender MUST make a short-sale offer to the borrower in the form of pre-approved terms and a minimum sale amount. The borrower, then, has 14 days to agree. Once the home is put on the market, buyer offers must be submitted to the lender within 3 days, and the lender, in turn, has 10 days to respond. This latter provision is crucial to the success of HAFA, since the main complaint prior to its implementation was that short-sales took too long to process. This deterred many buyers from even making offers, because they knew it would be many months before the respective lender would even deign to respond.
Under the terms of the program, borrowers are relieved of all obligations after the completion of a short sale, and lenders are forbidden from seeking deficiency judgments. In fact, even if the short-sale cannot be completed, the lender is still required to accept a deed-in-lieu-of-foreclosure, which likewise eliminates all debt obligations. Because of the incentive payments, then, it is in lenders’ best interest to try to complete a short-sale.
It looks like this program has a pretty good shot as succeeding, and more than 100 lenders (covering 89% of all outstanding loans) have already signed up. Let’s hope that this is the last time the government has to announce a new program…I think they are running out of acronyms.