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.
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