FANNIE MAE AND FREDDIE MAC IMPLEMENT HAFA SHORT SALE PROGRAM

  By Derik N. Lewis, Esq. When the Treasury announced its Home Affordable Foreclosure Alternatives (HAFA) program last year to streamline the short sale process, we were all surprised to see that it didn’t include the GSEs (Freddie and Fannie). They promised that the GSEs would have something soon; now we have it. Fannie Mae and Freddie Mac both issued new guidelines to servicers on June 1, 2010, which provide for a systematic short sale process. According to the HAFA servicing guide issued by Fannie Mae and the HAFA servicing bulletin by Freddie Mac, the GSEs are encouraging their servicers to implement their HAFA procedures “immediately” and all Fannie and Freddie servicers must have incorporated HAFA into their operations and begin offering HAFA solutions to eligible borrowers by August 1, 2010. The program runs through December 31, 2012. This is certainly a move in the right direction, but we have seen the banks move very slowly with the non-GSE HAFA program instituted back on April 5, 2010, and I expect the same from the GSEs’ HAFA program. Our office is still getting responses such as “what’s an ARASS” from intake employees at major servicers (some are still claiming not to know about HAFA). We certainly have a ways to go and we hope the GSEs can get up to speed quickly. The GSEs’ programs are substantially similar to the original HAFA program with regard to eligibility, procedures and timelines. THE MAJOR BENEFITS ARE THE SAME AS IN THE NON-GSE PROGRAM: –          The borrower receives pre-approved short sale terms prior to the property listing; –          Servicers are prohibited from reducing the real estate commission agreed upon in the listing agreement (this commission protection language is much stronger than the non-GSE HAFA program); –          Borrowers must be fully released from future liability for the debt (and, obviously, no promissory note for the balance); –          Servicers must use standard processes, documents, and timeframes; –          Borrowers, servicers and junior lien holders are provided financial incentives to complete the short sale (servicers will receive $2,200; borrowers are entitled to $3,000; and junior lien holders can get up to $6,000). A new element found in the GSE HAFA program is the “Deed-for-Lease.” If the borrower fails HAMP and can’t sell the home under the HAFA program, Freddie and Fannie must consider the homeowner for a Deed-in-Lieu (DIL) and then the Deed-for-Lease (D4L) program. The D4L program will allow the homeowner to stay in the home and rent it back from the bank after the Deed-in-lieu. I’m not certain how effective this will be in Southern California because of the extensive use of second loans and HELOCs which make a deed-in-lieu nearly impossible. THE MAJOR DRAWBACKS ARE ALSO THE SAME AS THE NON-GSE PROGRAM: –          PARTIAL MORTGAGE PAYMENTS REQUIRED: The lender can still require partial mortgage payments from the borrower up to 31 percent of the borrower’s gross monthly income. For a number of borrowers, this could be a major detraction from the short sale program. We will see how firm the lenders/servicers are with this issue.   –          SHORT RESPONSE TIME: The borrower must respond within 14 days once the servicer says ‘you are eligible’ – that’s simply not enough time for most borrowers. –          EVALUATION FOR HAMP REQUIRED: As with the original HAFA program, the new Fannie and Freddie HAFA program requires borrower to go through the Home Affordable Modification Program (HAMP). If the borrower fails the HAMP evaluation or doesn’t complete their modification plan, the servicer will offer a HAFA short sale or deed-in-lieu. Some borrowers already know they can’t qualify or simply don’t want a modification. Getting around this required HAMP screening is almost impossible even where the guidelines suggest you can make an “alternative” request for short sale WITHOUT the HAMP analysis (let’s see if the lenders/servicers loosen up on this). –          JUNIOR LIEN HOLDER TRAP. One of the biggest hurdles to every single short sale is getting approval from the junior lien holder. The junior lien holder is not subject to the terms of the HAFA program. Therefore, they can put up a roadblock to any short sale. The GSE HAFA program suffers from the same problem. –          PLUS The GSE HAFA programs prohibit servicers from considering or soliciting a borrower for HAFA if a foreclosure is scheduled to be held within 60 days. There is an escape clause to this prohibition and I hope it is regularly used because most homeowners don’t seek assistance until very late in the process. We typically see homeowners show up after the home has been scheduled for sale (in CA, that’s 21 days out). ANTI-STRATEGIC DEFAULT PROVISIONS:   Although all HAFA programs require the borrower have a hardship (which is to be detailed in their hardship letter), the GSEs step up the analysis of the financial hardship of the borrower. The GSE HAFA program contains a fairly specific evaluation of whether the borrower is attempting a strategic default (i.e. is walking away/short selling even though they can afford the mortgage). Although it is good practice to limit the moral hazard of the strategic default, these provisions will undoubtedly ensnare a number of borrowers that truly have a hardship but fail the analysis set forth below.             The servicer must evaluate: –          The borrower’s financial condition to determine whether the borrower has an ability to “contribute meaningfully to reducing the potential loss” (who defines “meaningful”…? Not the borrower, that’s for sure). –          The borrower’s ability to continue making the mortgage payments even if the borrower chooses not to do so. –          Whether the borrower has substantial unencumbered assets or significant cash reserves equal to or exceeding three times the borrower’s total monthly mortgage payment (including tax and insurance payments) or $5,000, whichever is greater. –          Whether the borrower has “high surplus” income. It is going to be very important for real estate agents and short sale processors to pay close attention to the borrower’s financial situation in order to ensure compliance with these guidelines. Although I’m hopeful about the GSEs’ implementation of HAFA, I am also realistic that it is going to take time to get everyone on the same page. ADDITIONAL RESOURCES AND INFORMATION FANNIE MAE HAFA SPECIFICS AND REQUIRED DOCUMENTS: https://www.efanniemae.com/sf/servicing/hafa/index.jsp FANNIE MAE LOAN LOOK UP: http://loanlookup.fanniemae.com/loanlookup/ FREDDIE MAC HAFA SPECIFICS AND REQUIRED DOCUMENTS: http://www.freddiemac.com/singlefamily/service/hafa.html FREDDIT MAC LOAN LOOK UP: https://ww3.freddiemac.com/corporate/ TREASURY (NON-GSE) HAFA PROGRAM AND DOCUMENT:  https://www.hmpadmin.com/portal/programs/foreclosure_alternatives.html FOR A LIST OF SERVICERS PARTICIPATING IN HAMP (and therefore subject tot HAFA): www.makinghomeaffordable.com/contact_servicer.html. About the Author: Derik N. Lewis is a California real estate broker and a practicing real estate attorney. Derik graduated magna cum laude from Boston University School of Law. He has 20 years of real estate experience and has served as legal counsel for some of the world’s largest lenders. During the current real estate downturn, Derik is applying his knowledge and experience to help homeowners, investors, and developers find alternatives to foreclosure. Borrowers facing default or foreclosure can get a skilled broker and experienced real estate attorney by contacting Derik or via phone at (949) 613-5900.

CALIFORNIA FORECLOSURE MEDIATION BILL (AB 1639 – FACILITATED MORTGAGE WORKOUT PROGRAM)

 

By Derik N. Lewis, Esq.

After a series of failed attempts at helping homeowners in foreclosure, California lawmakers are now proposing a state-mandated mortgage mediation program. Will this provide needed relief to distressed borrowers or just throw another speed bump at lenders and slow down the recovery?

Assembly Bill 1639 passed committee and will head to the California State Assembly floor this week. If this bill becomes law, it would establish the Facilitated Mortgage Workout (FMW) program which would require lenders to meet with borrowers in order to develop a modification plan before they could proceed with foreclosure.

Basic eligibility for the program is as follows:

  1. The property must be an owner-occupied principal residence.
  2. The loan must be a 1st mortgage originated prior to Jan 1, 2009.
  3. The unpaid principal balance can’t be more than $729,650.
  4. The law doesn’t apply if the borrower has already been offered a loan modification that would cut the borrower’s housing related debt to 38% or less of the borrower’s gross income.

 

Everything sounds good so far, but, as with other foreclosure prevention programs, the devil is in the details.

Although the law would “require” lenders to meet with borrowers prior to proceeding with foreclosure, the burden for initiating the program rests fully on the borrower’s shoulders (the program isn’t automatic commenced). The borrower must take substantial measures to activate the program. The lender does have to provide notice of the program in the Notice of Default (the recording of this “NOD” commences the statutory foreclosure process). This is where the problem starts. Most borrowers simply ignore the Notice of Default because they are overwhelmed once the foreclosure officially commences. As required by statute, borrowers receive about a dozen copies of the NOD all at once (some are certified mail, some are regular mail, and some are posted at the home). I have personally seen borrowers simply collect all the mail from the lender, including the NOD, and shove it all in a drawer, unopened.

Further, even if the borrower opens the NOD, the mediation program notice will be buried behind multiple pages of recently enacted statutory required disclosures. Borrowers may never even learn of the new mandated program and will most likely miss the 30-day deadline to opt in even if they do find the notices.

If the borrower actually receives and reads the notice and then wishes to opt into the mediation program, the borrower must complete a (yet-to-be determined) form and return it to the administrator of the program within 30 calendar days of receiving the notice of default. Further, the borrower will be required to provide “other information” within 15 days of the request to participate (tax returns, income verification, a “specified deposit of funds” and a hardship letter).

The major blow to this program is the requirement that borrowers deposit 50% of their current mortgage payment each month with the administrator while the borrower is negotiating the modification. Of course, those payments go to the lender if a loan modification fails, which they do more than 60% of the time. We have already seen that most loan modification programs simply don’t work. For loan mods, there is a narrow window between the front-end DTI analysis and the Net Present Value test. If the numbers don’t fit, you fail the program. Therefore, the borrower has to come out of pocket to get into a program that has already been proven to fail more than 60% of the time. Not great.

As for the “required” in person meeting being touted in the Bill, that meeting only occurs after the borrower has opted into the program, has met all of the obligations under the law, and deposited the 50% of the mortgage payment with the administrator.

There are good things about the program that should be noted. This bill has some teeth to slow down the foreclosure process and give the borrower a chance to really think through the options (including negotiating a short sale or possibly a “planned foreclosure” with a cash-for-keys exit). There is also strong language requiring the lender to suspend the foreclosure process while the borrower is actually negotiating in the program. The Bill requires a third-party “conciliation officer” to be involved which might give the lender some perspective on the situation. Finally, there are tight guidelines to get an answer from the lender.

These high points aside, it is hard to be optimistic that this program will help many homeowners. Prior foreclosure moratoria and loan modification programs (both state and federal) have been unmitigated failures. First, we had the California’s Foreclosure Reform Law (Senate Bill 1137), which “added” a 30-day period before the NOD could be filed. The word added is in quotes because lenders typically wait something like 90 or 120 days after the borrower is in default before filing for foreclosure, so there really is no additional time granted to the borrower. This was pointless legislation Then, the California Foreclosure Prevention Act (ABX2 7 and SBX2 7) added an additional 90 day period between the NOD filing and the Notice of Trustee Sale (this “NTS” sets the actual foreclosure auction date for the home). However, that law provided an exemption that my 3 year old daughter could find her way through. Therefore, essentially no lender is subject to the extra 90-day period whatsoever. This was also pointless legislation. Finally, we all know about the ongoing failure of the Treasury’s much hyped HAMP modification program.

For all its good intentions, Assembly Bill 1639 appears to be just more of the same: Pointless legislation.

About the Author:

Derik N. Lewis is a California real estate broker and a practicing real estate attorney. Derik graduated magna cum laude from Boston University School of Law. He has 20 years of real estate experience and has served as legal counsel for some of the world’s largest lenders. During the current real estate downturn, Derik is applying his knowledge and experience to help homeowners, investors, and developers find alternatives to foreclosure. Borrowers facing default or foreclosure can get a skilled broker and experienced real estate attorney by contacting Derik or (949) 613-5900.

EXPANSION OF CALIFORNIA’S PURCHASE MONEY ANTI-DEFICIENCY PROTECTION

 

By Derik N. Lewis, Esq.

The California Association of REALTORS® (C.A.R.) declared “victory” upon the Senate passage of SB 1178 on June 3, 2010 (the bill now moves to the Assembly for approval). Should this bill become law, California real estate agents should be cautioned to read the legislation very carefully because the protections afforded will be very narrow in scope.

We already know that California Code of Civil Procedure (CCP) Section 580b prohibits a lender from seeking a deficiency judgment after the foreclosure on a “purchase money” loan. A purchase money loan is a loan that was used to acquire an owner-occupied residence. Most borrowers do not understand that when they refinance a purchase money loan, even if just to get a better rate and term, they lose the anti-deficiency protections of CCP 580b.

As C.A.R. explains in its “RED ALERT” announcement, SB 1178 is meant to extend the anti-deficiency protections found in 580b to homeowners who have refinanced purchase money loans and are now facing foreclosure. What is left unsaid from the announcement is that the protections in the proposed law are limited to the amount of the original purchase money loan. Therefore, borrowers are still exposed to deficiency claims for any “cash-out” portion of the refinancing. It is this cash out portion of the refinancing that is creating the extensive deficiency exposure faced by many California borrowers.

If this bill is signed into law by the Governor, we should be careful not to overstate of the victory, as was done upon the passage of the Mortgage Forgiveness Debt Relief Act of 2007 (borrowers were being told that all cancellation of debt was tax free – this is simply not the case). While SB 1178 will produce a very good law, it will not be a panacea for the aftermath of California’s refinance boom.

About the Author:

Derik N. Lewis is a California real estate broker and a practicing real estate attorney. Derik graduated magna cum laude from Boston University School of Law. He has 20 years of real estate experience and has served as legal counsel for some of the world’s largest lenders. During the current real estate downturn, Derik is applying his knowledge and experience to help homeowners, investors, and developers find alternatives to foreclosure. Borrowers facing default or foreclosure can get a skilled broker and experienced real estate attorney by contacting Derik or (949) 613-5900.