Tracey Martin's Blog

The HAFA program is the government’s new short sale/ deed-in- lieu program.  The government created the program in an effort to assist homeowners who can no longer afford their home and who want to avoid the damage a foreclosure does to a borrower’s credit. The following is my understanding of the program guidelines as presented in the MAKING AFFORDABLE Supplemental directive 09-09.

The federal government has asked lenders to voluntarily implement a new program called Housing Affordable Foreclosure Alternative (HAFA.) The start date is April 1, 2010 although it is expected that some lenders will implement the program sooner and as I stated earlier, lender participation is voluntary.  The guidelines further state that a lender who participated in the HAMP (Homeowner Affordable Modification Program) will be required to participate in HAFA. Loans in which Fannie or Freddie has an interest in do not qualify.  They are working on their own short sale program.

In order to qualify for HAFA, a homeowner must meet the basic eligibility requirements for HAMP.  They are:

• The property is the borrower’s primary residence.
• The mortgage loan is the first lien originated before 01/01/09.
• The mortgage is delinquent or default is reasonably foreseeable.
• The current mortgage balance is $729,750.00 or less.
• The borrower’s monthly mortgage payment exceeds 31% of the borrower’s gross income.
• If the borrower has mortgage insurance, the insurer must waive any right to collection from the borrower.

If a borrower meets the following criteria, the participating servicer must give the borrower the option to enter into the HAFA program:

• The borrower did not qualify for the HAMP trial period.
• The borrower did not successfully complete the HAMP trial period.
• The borrower is delinquent on their HAMP modification.
• The borrower requests a short sale or deed-in-lieu.

The good news for sellers who participate in HAFA:

• The lender is required to forgive any deficiency (no more waiting and wondering if they are going to pursue the deficiency.)
• The sellers will get $1500.00 at close of escrow.
• Servicers are expected to provide an approval letter 10 days from the date the offer is received (no more waiting for months with no guarantee that the short sale will be approved.)
• The short sale will be pre-approved and the server will provide the listing agent with a pre-approved listing price.
• The server will pay up to 3%, but no more than $3000.00, to junior lien holders.
• If a borrower meets the HAMP qualification requirements listed above, they can participate in HAFA without going through the HAMP program first; as long as their servicer is participating in the program.  However, if the borrower hasn’t gone through HAMP first, it will be very difficult for a servicer to get an approval letter to the borrower ten days from the offer submission date, and it will more than likely create delays. During the HAMP program process the borrower’s hardship is evaluated. The servicer becomes very familiar with the homeowner’s situation and all the obstacles that cause short sales to take forever are dealt with. Short sale pre-approval is pretty much determined through the HAMP process, so going through the HAMP program first will help the short sale to move quickly through HAFA.

The good news for buyers:

• The endless waiting for short sale approval will be eliminated. Short sale approval in 10 days or less.
  • Lenders must allow at least 45 days for close of escrow.

This program will take all those frustrating unknowns out of the short sale process.

Most of the concerns I have about the program are for those borrowers who have other liens on their property.

The HAFA summary states that it is the borrower’s responsibility (with the assistance of their Realtor) to “deliver clear marketable title to the purchaser or investor.”  It further says that the servicer can assist the borrower and the listing agent in the negotiations with lien holders, but they are not required to do so.  An experienced Short sale agent knows how to negotiate with junior lien holders; however juniors could create problems based on HAFA guidelines.

The program provides $3000.00 for junior lien holders. It also requires that junior lien give up the right to pursue any deficiency. If a junior wants more than $3000.00 and/or is not willing to forgive the deficiency, the borrower will not be able to obtain clear title as required. Multiple junior liens could create a problem.  If there is more than 1 junior lien holder, $3000.00 may not be enough to satisfy them all.

Another potential issue is that senior liens are not mentioned in the program guidelines. Property taxes are considered a senior lien and currently lenders will pay past due property taxes in order to obtain clear title. Since the HAFA program stipulates that providing clear title is the borrower’s responsibility, one could assume that the borrower will have to pay any past due property taxes, before close of escrow, so clear title can be provided.

One other important requirement:

• The transaction must be completely arms length.  No one involved in the transaction can be related. This includes the Realtors, the buyers and the sellers.

My Thoughts

In California lenders have 2 choices for foreclosure, judicial or, the more popular, non-judicial foreclosure (trustee sale.) Odds are that a lender will pursue the trustee sale route because it is much cheaper.  However, by taking the trustee sale route the lender gives up any right to pursue a deficiency.

Currently in a short sale transaction the lender does not automatically give up the right to pursue. Large numbers of short sales fail because borrowers are concerned that the lender may pursue the deficiency. The fact that the HAFA program requires that the lender forgives any deficiency is a huge relief for borrowers struggling with their mortgage. Other than the problems that may arise with other lien holders, this program is a major step in the right direction for borrowers who are “under water.” It gives them a real chance at a fresh start. There are so many borrowers out there that who responsible people that find themselves in a night mare they never imagined.  This program is an opportunity to move beyond the night mare and begin again.   It is also a win for everyone who lives in the neighborhood of the borrower who participates in HAMP because  short sales generally do not bring down the value of the neighborhood as much as an REO does.  Overall I see this as a positive  solution for homeowners in a very difficult situation.

I have been visiting a lot of homeowners in distress lately and most of them are trying to modify their loans.  But I wonder; are loan modifications in a homeowner’s best interest.

Let say your lender creates a plan that gives you a payment you can afford, at least for the next several years, what happens when you are at the end I have been visiting homeowners in distress and I have found that most of of the modification period and you can’t refinance?

Really wanting to do what is best for my clients and my community, I have been doing a lot of online research trying to find out how long it will take a homeowner who is under water to accrue any equity, or at least be at the breakeven point.

There wasn’t a lot of information on the subject, but here’s a study I found:

Brent T. White, from the University of Arizona James E Rogers College of law, published a paper in October 2009 called “Underwater and not walking away.” It appears that he did extensive research.

In his paper he references a couple from Salinas. They owe $585,000.00 on their home that is now valued at$187,000.00.  According to the author the couple would save $340,000.00 by walking away, assuming they planned to stay in the home for ten years. He further states that if we assume that the Salinas market has hit bottom and their home “appreciates at the historical appreciation rate of 3.5% annually,” it will take more than 60 years for them to recover their equity.

Sixty years with no equity.  Wow.

In the past, home owners have used the equity in their homes for things like home improvements, putting a kid through college, and paying off other debt.  In the past when a homeowner retired they could sell their home and pay cash for something smaller. If this couple chooses to stay in their home, they will never be able to borrow against it.

They will not be able to leave it to their children because they would be leaving them a liability, not an asset.

They will not be able to sell it and pay cash for a smaller home.

It is no longer a “nest egg.” It will be a liability for the rest of their lives.

This study confirms my reasoning that a short sale is a much better option for underwater homeowners.  That is why 3 years ago, I decided to become a Realtor who specializes in short sales. While my fellow Realtors were telling me “I was nuts” because a short sale transaction can be very difficult and frustrating, I knew it was the best way for me to serve my clients and my community.  While everyone one was trying to get those easy REO listings, I was fighting for my client’s credit and their ability to buy a home in the future.

If you have been trying to get your loan modified, take some time to think about the negative equity in your home. Is it worth hanging onto?

The reality is that if you short sale your home, Fannie Mae guidelines state that you can buy another home in two years. I have had short sale client’s whose credit was 710 or better one year after their short sale.

No one who works in the real estate industry thinks that prices are going to go up by much in the next 2 years and if you have taken care of the rest of your credit, you will be able to buy a home that will have a chance to grow equity.

Fannie Mae guidelines also state that you can buy another home right away if you have not missed a payment.

As I stated earlier, before you agree to a loan modification consider the negative equity in your home. If you owe 2 or 3 hundred thousand dollars more than your home is worth, it is unlikely that your home will ever be an asset.  Also remember that it is just a place to live.  If you choose to short sale your home, you get to take everything that truly matters with you.  A house is just a house; it is the love of family and friends that make it a home.

It breaks my heart when I hear a homeowner say they paid a third party to modify their home loan and got no help.  There are too many people out there claiming to be “loan modification consultants” and making promises they cannot keep. Worse yet they are charging desperate homeowners thousands of dollars to perform a service they know they may not be able to deliver.

I am happy to say that, as of yesterday, there is a California bill on the governor’s desk that would make collecting money in advance for a loan modification illegal.

The bill is AB764, the Homeowner Fraud Prevention Act.

The essence of the bill says this:

• Only a homeowner or a licensed realtor can perform services for borrowers in connection with the modification of terms of a mortgage loan.
• No up- front fees can be charged for this service. In other words, if the loan is not modified no fees can be charged.
• Violations include a $20,000.00 fine for an individual and a $60,000.00 for a corporation and up to 1 year in jail.

This legislation is great news for homeowners who are desperate and vulnerable.  Once the bill is signed the only people assisting with loan modifications will be those interested in helping a struggling homeowner; not scammers or people just looking to make a buck without regard for the homeowner situation.