HOME AFFORDABLE FORECLOSURE ALTERNATIVES (HAFA)
HAFA will allow a payment of $10,000 to sell your home for less than the outstanding balance of your mortgages and avoid a foreclosure. You will also receive a full release of liability from your lenders.
HAFA is the Home Affordable Foreclosure Alternatives Program (HAFA) instituted by the U.S. Department of the Treasury which is designed to help financially distressed homeowners who are unable to keep their homes because they either don’t qualify for a loan modification under the Home Affordable Modification Program (HAMP) or they have other hardships which require them to leave the home.
Under the HAFA Program, which took effect April 5, 2010, homeowners may be able to avoid foreclosure by selling their home as a “short sale” (where the home is sold for less than the remaining amount of the mortgage) or by transferring title to the lender through a process called a “deed-in-lieu of foreclosure” (DIL). The U.S. Treasury Department is providing cash incentives to homeowners, servicers, lenders and junior lien holders in order to facilitate these alternatives to foreclosure.
In a short sale, the lender allows the homeowner to sell their home for an amount less than required to pay off the mortgage. The costs and fees associated with the closing are deducted from the amounts that would otherwise go to the lender. By allowing a short sale, the lender doesn’t need to pursue the foreclosure process, and the homeowner is able to avoid the negative effects of a foreclosure.
If the short sale is unsuccessful, the homeowner might still be able to avoid a foreclosure action by requesting that the lender accept a “deed-in-lieu of foreclosure” (DIL) whereby the homeowner would voluntarily transfer ownership of the property to the lender. A DIL is available in only limited circumstances because there can’t be any outstanding liens or encumbrances other than the first lien. Therefore, DILs only occur in rare situations.
- Provides significant cash incentives to all parties to complete a short sale or DIL instead of foreclosure.
- Designed to simplify and streamline the short sale process by providing a standard process along with uniform documents and deadlines.
- Provides for pre-approved short sale terms before the homeowner lists the property for sale (including the minimum acceptable net proceeds and closing costs).
- Requires borrowers to be fully released from future liability for the first mortgage debt. If the junior lender receives an incentive under HAFA, they must also release the borrower from future liability. Therefore, there will be no cash contributions, promissory notes, or deficiency judgments.
- FINANCIAL INCENTIVES! $10,000 for borrower relocation assistance; and additional amounts to servicers and second liens as an incentive to cooperate in the short sale process.
The criteria to be considered for a HAFA Short Sale are as follows:
- The loan must be a first lien mortgage which was originated before 2009.
- The unpaid principal balance must be no more than $729,750 (higher limits for 2 to 4 unit dwellings).
- The borrower must be delinquent on the loan or default is reasonably foreseeable.
- The borrower must have a documented financial hardship.
All servicers that are participating in HAMP are required to comply with HAFA. To see if your servicer is included, go here: www.makinghomeaffordable.com/contact_servicer.html and either enter the servicer’s name or select “show all servicers” and see whether your servicer is on the list.
1. Servicers must consider the homeowner for HAFA within 30 DAYS after one of the following:
· borrower fails to qualify for a HAMP trial period,
· borrower does not successfully complete a HAMP trial period plan,
· borrower becomes delinquent on a HAMP modification (2 missed payments), or
· borrower REQUESTS a short sale.
2. If a servicer has not already discussed a short sale with the borrower, then they must notify the borrower in writing of the HAFA option and give the borrower 14 DAYS to respond. If the borrower does not respond to this written notice of the HAFA program, the servicer’s duty to provide the HAFA options ends.
IF BORROWER IS INTERESTED IN A SHORT SALE:
3. The servicer completes a “Short Sale Agreement” (SSA) which contains all the particulars regarding the short sale terms and conditions (e.g. acceptable list price, net proceeds from the sale, closing costs or other permitted expenses). The borrower has 14 DAYS from the date of the SSA to sign and return it to the servicer.
4. The borrower must engage a licensed broker to list and market the home. The servicer must give the homeowner 120 DAYS to sell the house (extensions up to 12 months are possible).
5. Within 3 DAYS of receiving and accepting a purchase offer, the borrower (through their broker) must submit a completed Request for Approval of Short Sale (RASS) to the servicer along with the complete purchase agreement and additional information required in the SSA.
6. Within 10 DAYS after the servicer receives completed RASS and all required attachments, they must approve or deny the request and advise the borrower of the decision (with an explanation if there is a denial).
7. Once the short sale is approved, the buyer and seller must close the transaction. The lender may not ask the seller to close any earlier than 45 days.
- The lender is required to waive all deficiencies which creates a “cancellation of debt income” issue with the IRS. The amount of debt forgiven might be treated as income for tax purposes. You will receive a 1099-C and will need to report the amount cancelled on your tax return. There are exemptions from the tax resulting from cancellation of debt. Please go here to read more: IRS.gov (Debt Cancellation)
- The deal must be “arms length.” Borrowers can’t sell their property to a relative or anyone else with whom they have a close personal or business relationship.
- The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment. There will be a negative effect on credit scores.
- 90 day “No-Flipping” term: Buyers must agree not to sell or transfer the property within 90 days after closing.
Although the HAFA guidelines contemplate that a borrower can waive consideration for a HAMP modification and proceed with a HAFA short sale, it is not clear right now that lenders are willing to follow that request. The following is the language from the HAFA guidelines regarding the submission for an “Alternative Request for Approval of Short Sale”:
If the borrower has an executed sales contract and requests the servicer to approve a short sale under HAFA before a Short Sale Agreement (SSA) has been executed, then the borrower must submit the request to the servicer in the form of the Alternative Request for Approval of Short Sale (an “Alternative RASS”). Upon receipt of the Alternative RASS, the servicer must determine the basic eligibility of the borrower.
If the borrower appears to be eligible and was not previously considered for a Trial Period Plan, the servicer must notify the borrower verbally or in writing of the availability of a HAMP modification 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 for a HAMP modification. If the borrower does not wish to be considered for a modification, the servicer may consider the Alternative RASS in accordance with this Supplemental Directive without first having to enter into an SSA with the borrower. If the servicer approves the short sale, then the loan will qualify for the HAFA program.
As originally implemented by the U.S. Department of the Treasury, the HAFA Program excluded all Fannie Mae and Freddie Mac (GSE) loans. As of June 1, 2010, both GSEs issued new guidelines to servicers which provide for a systematic short sale process in accordance with the HAFA Program. 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. Both programs are almost identical to the Treasury’s HAFA program for non-GSE loans. The borrower must first be evaluated and denied for a Making Home Affordable Program (HAMP) workout plan.
Some of the differences between the GSE and non-GSE programs are as follows: To be eligible under the non-GSE HAFA program, the borrower must be delinquent or default must be reasonably foreseeable. Under Freddie’s requirements, a borrower must be more than 60 days delinquent and have cash reserves less than the greater of $5,000 or three times the current monthly mortgage payment. Fannie allows borrowers to be at imminent risk of default. Fannie also prohibits a borrower from participating in HAFA if the borrower has the ability to continue making the mortgage payments, but chooses not to do so (sometimes called “Strategic Default”); has substantial unencumbered assets or significant cash reserves equal to or exceeding three times the borrower’s total monthly mortgage payment or $5,000, whichever is greater; or has high surplus income. Fannie and Freddie allow for servicer incentives of $2,200 for a short sale and $1,500 for a deed-in-lieu of foreclosure (DIL). This is in contrast to the $1,500 servicer incentive for both a short sale and a DIL for non-GSE mortgages.
To determine if you have a Freddie or Fannie loan, go here: LOAN LOOK UP