With new guidelines due to take effect in April, and with lenders able to implement them earlier, the frustrating process of short sales should become easier.
The guidelines are part of the new government Home Affordable Foreclosure Alternative Program (HAFA). The purpose is to enable borrowers who are eligible for loan modification programs but are unsuccessful in their attempts, to work out a plan with their
lenders to execute a short sale or deed in lieu of foreclosure (where the homeowner relinquishes their rights to the property and passes ownership back to the bank).
The HAFA program applies to a large volume of risky loans not owned by Fannie Mae and Freddie Mac (these agencies will be issuing their own guidelines) as follows:
- The property must be the owner’s principal residence.
- The mortgage loan is a first lien mortgage originated on on before January, 1, 2009.
- The mortgge is delinquent or default is resonably foreseeable.
- The current unpaid principal balance is equal to or less than $729,750.
- The borrower’s total monthly mortgage payment exceeds 31% of the borrower’s gross income.
The HAFA guidelines are voluntary, but many of the major banks, smaller lenders, and servicers are expected to participate in order to clean up the mess and to avoid an influx of short sales.
These guidelines should help as there is an incentive for lenders to participate. They receive $1,000 to cover costs, and subordinate lien holders receive up to $3,000 in order to release their lien. Also borrowers receive $1,500 towards moving costs.
Standardized forms, procedures, and timelines will be provided and the borrower will receive pre-approved short sale terms prior to listing the property. This will attract more serious buyers who are loathe to invest time and money in the short sale process with no guarantee of ever getting the property. The HAFA guidelines also prevent lenders from coming after the borrower for the balance of the debt.
Even though it will take months for lenders to put procedures in place to comply with the guidelines, and it will not solve all the problems, it will alleviate some of the pain. Bsnk of America has had a short sale fall-out rate as high as 70% as compared with REO transactions with a 10-15% fall out rate.
Wouldn’t we all like to see the short sale process being planned and well-orchestrated as opposed to the free-for-all we have seen in the past.