The rules are part of the Treasury’s Home Affordable Foreclosure Alternatives — HAFA — program and are aimed at speeding up lenders’ decisions on short sales and making life easier for sellers.
“It streamlines and shortens the short-sale process,” says Kurt Gleeson, national vice president of sales for Charlotte, N.C.-based RealEstate.com. “Prior to HAFA, the time period for short sales varied greatly among lenders, and it was a very uncertain process.”
A short sale, also called a preforeclosure sale, occurs when homeowners can’t afford their home mortgage payments and the house is worth less than they owe on it. The lender accepts the proceeds from the sale, even though the price doesn’t cover the entire debt.
The knock on short sales is they take too long. A short sale can be done only with the lender’s permission, and the lender sometimes takes months to decide whether to accept the buyer’s offer. Even when the delayed answer is “yes,” the buyer often has given up and bought another house.
Under HAFA, the lender decides upfront the minimum price it will accept. Then, the lender and homeowner have tight deadlines to meet. Finally, the seller gets $3,000 in moving expenses for leaving the house in decent shape.
What borrowers need to know
HAFA is an alternative to the more desirable HAMP — the Home Affordable Modification Program. Both programs are intended to keep borrowers in their homes and out of foreclosure.
Homeowners are evaluated for a HAFA short sale if they are eligible for HAMP and the following two criteria apply to the borrower:
- Flunks outs of a HAMP modification by missing payments; OR isn’t offered a trial modification; OR rejects a loan modification offer.
- Lender doesn’t have a non-HAMP loan modification for the homeowner.
Borrowers who qualify for HAFA and request a short sale receive a seven-page document called a “short sale agreement” from their lenders. A borrower has two weeks to respond. After responding, the borrower has four months to sell the house.
At that point, the borrower and the lender operate on parallel tracks:
- The borrower hires a real estate agent. Meanwhile, the lender hires someone to assess the property’s value.
- The borrower continues to make mortgage payments, but the payments are reduced to a maximum of 31 percent of monthly income. The lender keeps track of the shortfall between what is owed and what’s being paid.
- While the borrower waits for prospective buyers to make offers, the lender decides the “minimum acceptable net proceeds.”
“Minimum acceptable net proceeds” is a term that represents the smallest amount of money a loan’s owner will accept. This sum is affected by:
- How much the borrower owes on the first mortgage.
- How much is owed on the second mortgage.
- The unpaid interest racked up.
- Expenses such as closing costs.
- The real estate agent’s commission.
The lender might or might not tell the borrower the bottom-line amount.
“HAFA requires (the lender) to establish the net. You don’t have to speak it,” says Jim Satterwhite, chief operating officer for the parent company of National Quick Sale, a Jacksonville, Fla.-based technology provider for mortgage servicers that deal with delinquent loans.
Decision required within 10 days
If a buyer comes through before the four-month deadline, the seller and the buyer send the lender a document called a “request for approval of short sale,” or RASS.
The lender is required to give a yes-or-no response within 10 days of receiving the RASS and a thick pile of accompanying paperwork. The answer must be “yes” if the deal meets the minimum acceptable net proceeds.
After the buyer closes, the seller is entitled to a “relocation incentive” of $3,000.
“That doesn’t pay for much of a move, obviously, but depending upon the price point, having that borrower assistance with relocation expense is a very creative and it’s a very useful tool,” says Richard Powers, senior vice president of real estate services for Altisource Portfolio Solutions, a company in Kennesaw, Ga., that manages foreclosures.
For many borrowers involved in HAFA short sales, the process won’t be so straightforward. A lot of troubled homeowners have home equity loans or home equity lines of credit. Lenders attached to home equity loans and HELOCs have the power to block a short sale if they get stiffed. Under HAFA, equity lenders get some proceeds of the sale, but they don’t get much.
Mortgage insurers have the ability to stop short sales, too. Some mortgage insurers won’t approve a short sale unless the borrower gives them a few thousand dollars. They’re not allowed to hit up borrowers for money in a HAFA short sale. As a result, they’re sometimes reluctant to approve sales under the HAFA rules. They have the option of saying no.