Home Affordable Foreclosure Alternatives Program Begins April 5, 2010

Last year, the United States Treasury Department introduced the Home Affordable Modification Program (“HAMP”) to assist struggling homeowners to obtain loan modifications. HAMP provides eligibility, underwriting, and servicing guidelines for a uniform loan modification process. The Treasury Department, however, recognized that not all homeowners eligible for HAMP will be able to remain in their homes

Therefore, in November 2009, the Treasury Department released its Supplemental Directive 09-09, which provides alternatives to foreclosure sales for those borrowers who will not be able to remain in their homes.

The Home Affordable Foreclosure Alternatives (“HAFA”) program provides financial incentives to lenders, loan services, and borrowers to utilize a short sale or deed-in-lieu of foreclosure to avoid a foreclosure on an eligible loan under HAMP. The effective date of Supplemental Directive 09-09 is April 5, 2010, but a loan servicer may elect to implement HAFA before that date, provided it is able to collect and report all required information.

The eligibility criteria for participating in HAFA are the same as the criteria for participating in HAMP. Those conditions are:

• The property is the borrower’s principal residence;
• The mortgage loan is a first lien mortgage originated on or before January 1, 2009;
• The mortgage in delinquent or default is reasonably foreseeable;
• The current unpaid principal balance is equal to or less than $729,750; and
• The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income.

Participating servicers must develop a written policy, consistent with investor guidelines, that describes the terms on which the servicer will offer the HAFA program to borrowers. The policy must require the servicer to consider every potentially eligible borrower for HAFA before the borrower’s loan is referred to foreclosure or the servicer permits a pending foreclosure sale to proceed.

If a borrower is approved for HAFA, he will receive preapproved short-sale terms before listing the property, including the minimum acceptable net proceeds, which may be either a fixed dollar amount or a percentage of the current fair market value of the property. The terms of a HAFA short sale agreement must include the following conditions:

(1) the borrower must list the home for sale with a licensed real estate agent;

(2) the borrower has 120 days to sell the home, which period may be extended at the lender’s discretion;

(3) the lender must postpone any pending foreclosure sale;

(4) the borrower must maintain the property in good condition;

(5) a lender may set a new monthly mortgage payment pending the sale, but that payment cannot exceed 31% of the borrower’s monthly income;

(6) the borrower cannot sell the property to a family member, friend, or business associate;

(7) the borrower must move out at the close of escrow;

(8) the buyer cannot resell the property for 90 days after the close of escrow; and

(9) the lender has ten business days to approve a short sale that meets or exceeds the minimum net price.

If a sale occurs on the preapproved terms, the borrower will be fully released from future liability under the first mortgage. HAFA prohibits lenders or servicers from requiring a reduction in the real estate commission of up to six percent agreed upon in the listing agreement.

HAFA provides financial incentives to borrowers, servicers, and lenders, including:

• $1500 for borrower relocation assistance;
• $1000 for services to cover administrative and processing costs; and
• $1000 for lenders in exchange for allowing a total of up to $3000 in short sale proceeds to be distributed to subordinate lien holders.

If the borrower is unable to complete a short sale, the lender and borrower may agree to allow the borrow to execute a deed-in-lieu of foreclosure. The borrower will receive a waiver of the loan deficiency and $1500 in relocation assistance.

The HAFA program will continue until December 31, 2012.

Posted by: Darren A. Craig

Categories: Foreclosures