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.
- The loan servicer can use the financial information and hardship letter that the homeowner submitted for a loan modification, or request updated information to evaluate the homeowner’s eligibility.
- The loan servicer must assess the current value of the home. If the short sale or DIL isn’t completed, the servicer can add the cost of this assessment (e.g., an appraisal) to the loan balance.
- The homeowner must sign a Short Sale Agreement or DIL Agreement on or before Dec. 31, 2012.
- The home must be listed for sale with a licensed local-area real estate professional. (This requirement doesn’t apply to DIL.)
- The homeowner must cooperate with the real estate professional’s efforts to sell the home and maintain the interior and exterior of the home.
- The servicer and homeowner must meet a number of time frames.
- The lender may require the homeowner to make full or partial payments on the mortgage, up to 31 percent of the homeowner’s income, subject to the lender’s written policies.
- The homeowner cannot have a close business or personal relationship with the real estate agent or buyer and cannot have an expectation of buying back or renting the home after the short sale or DIL closes.
- The lender can initiate or continue, but not complete a foreclosure sale while the homeowner is involved in the program.
- Homeowners should discuss the income tax consequences of debt forgiveness with a qualified tax professional.
- The servicer will report the short sale or DIL to the credit bureaus. That will hurt the homeowner’s credit score, although not as severely as a foreclosure.
- The buyer in a short sale can’t resell the home within 90 days of the purchase.
- The program is scheduled to launch April 5, 2010, and sunset Dec. 31, 2012. Servicers may elect to implement the program sooner than the official effective date.
- Homeowners are encouraged to contact their loan servicers to find out whether they are eligible for the program or call the HOPE hot line at (888) 995-4673 to speak to a government-certified mortgage counselor. More than 100 servicers have signed up for the program. These servicers are required to participate and write their own policies subject to investor guidelines.