New alternative to foreclosures unveiled

Highlights

• New program will encourage short sales in lieu of foreclosure.
• Homeowner must deliver clear title without second loans or liens.
• Fannie Mae and Freddie Mac will issue separate guidelines.

Homeowners who can't afford their mortgage payments may want to take a look at the federal government's new alternative to foreclosure: the Home Affordable Foreclosure Alternative program, or HAFA, which intended to encourage lenders to facilitate short sales and deeds-in-lieu, or DIL, as alternatives to foreclosure.

The program, which is a part of the Home Affordable Modification Program, or HAMP, may help some homeowners escape a bad situation, but the rules are complicated and they won't be able to keep their homes.

U.S. Treasury Assistant Secretary Herbert Allison explained the concept in congressional testimony last year.

"HAMP does not, nor was it ever intended to, address every delinquent loan," he said. "In these instances, the borrower may benefit from an alternative that helps the borrower transition to more affordable housing and avoid the substantial costs of foreclosure."

Here are some details from the government's 43-page directive for loan servicers:

• A short sale allows the homeowner to sell the home and use the proceeds to satisfy the first mortgage even if the sale price is less than the loan balance.
• A DIL allows the homeowner to voluntarily give up the home to satisfy the first mortgage even if the home is worth less than the loan balance.
• The homeowner can get preapproval for a short sale at a specific minimum price or net proceeds before the home is put on the market.
• The homeowner can receive $1,500 for relocation expenses at closing. This sum may be reported to the Internal Revenue Service as income.
• The home must be the homeowner's principal residence.
• The mortgage must be delinquent, or default must be reasonably foreseeable.
• The unpaid loan balance must be less than $729,750 for a single house or condominium. Higher limits are allowed for two- to four-unit residential properties.
• The homeowner's monthly mortgage payment must be more than 31 percent of his or her gross income.
• The homeowner must transfer clear title. The lender will allow up to 3 percent of each second loan or lien, up to $3,000 in total, to help the homeowner satisfy these obligations.
• The government's directive excludes loans that are owned or guaranteed by Fannie Mae or Freddie Mac. However, the two government-run mortgage corporations are expected to release their own guidelines. Homeowners can use the Loan Look Up Tool on the Making Home Affordable Web site to find out whether they have a Fannie Mae or Freddie Mac loan.
• The lender cannot require a cash contribution or promissory note, cannot pursue a deficiency judgment and must release the homeowner from all future liability for the debt.