HAFA Gothca's!? (Home Affordable Foreclosure Alternative)

Second Mortgage or Mortgage Insurance? Watch Out for HAFA!!!???

Home Affordable Foreclosure Alternatives (HAFA) , the most recent attempt by the Fed’s to sound like they are doing something to assist homeowners facing foreclosure, sounds good at first blush, but is it really going to help?

Ideally, through HAFA, the distressed homeowner completes a short sale and by doing so has no lingering liability for the difference between what they owed the bank and what the bank nets as a result of the short sale.

I have borrowed verbatim chunks from Supplemental Directive 09-09 (HAFA) to introduce what HAFA is about and I have added comments where I see continued opportunities for game playing on the part of the loan servicers and a failure to address the problems associated with Short Sales. 

In fact, HAFA may force a less favorable outcome on home owners who have second liens or Mortgage Insurance.

For those who aren't familiar with HAMP, it is the Home Affordable Mortgage Program, also a miserable failure, which is supposed to assist home owners in getting loan modifications.  If the borrower can't qualify or defaults on the HAMP program, then they can be considered for the HAFA program.  The Servicer is supposed to notify the borrower of their options and the borrower has 14 days to respond, other wise they lose the opportunity to participate.

It is difficult to see how this program will help short sellers with subordinate loans or Mortgage Insurance as discussed below.

HAFA must be offered:

Servicers must consider HAMP eligible borrowers for HAFA within 30 calendar days of the date the borrower:

• Does not qualify for a Trial Period Plan
• Does not successfully complete a Trial Period Plan
• Is delinquent on a HAMP modification missing at least two consecutive payments, or
• Requests a short sale or deed-in-lieu of foreclosure

HAFA Features

• Servicer is to use borrower financial and hardship info provided for HAMP loan mod application
• Allows borrower to receive pre-approved short sale terms prior to listing the property
• Prohibits the servicer from requiring, as a condition of approving a short sale, a reduction in the real estate commission agreed upon in the listing agreement
• Requires that the borrower be fully released form future liability for the debt

Servicers must evaluate a borrower for a HAMP modification prior to any consideration being given to
HAFA options.

HAFA Eligibility Requirements

• The property must be the borrowers principal residence
• The mortgage loan is a first lien originated on or before January 1, 2009
• The mortgage is delinquent or default is reasonably foreseeable
• The current unpaid principal balance is equal or less than $729,750
• The borrower's monthly mortgage payment exceeds 31 percent of the borrower's gross income.

Every potential HAFA borrower must be considered for HAFA before the borrowers loan is referred to foreclosure or the servicer allows a pending foreclosure sale to be conducted. 
HAFA Short Sale

• Prior to approving borrower to participate in a HAFA short sale the loan servicer must determine the minimum acceptable net proceeds (minimum net) that the investor will accept from the transaction.  This may be based on "customary transactional costs of each sale"

• The language above allows servicers lots of opportunity for game playing.  Depending on the lender, they currently routinely deny approval for items that are standard costs to a seller in a normal sale, for example, recordation costs, transfer taxes, water and gas bills, condo fees, HOA fees etc.

• Allowable Transaction Costs - in determining the minimum net the servicer must consider reasonable and customary real estate transactions costs for the community in which the property is located and determine which of these costs the servicer or investor is willing to pay from sale proceeds.

·         Emphasis added.  This is an area servicers use all the time to increase the cost of the short sale to the buyer.  They regularly refuse to pay "customary" costs of a sale. 

·        Servicers may amend the terms of the SSA (Short Sale Agreements) in accordance with investor requirements a condition you could drive a truck through.

·        The amount of the real estate commission that may be paid, may not exceed 6%...and notification is required, if any portion of the commission must be paid to a contractor of the servicer that has been retained to assist the listing broker with the transaction.

• Other concerns: the lender may require the borrower makes payments during the Short Sale process.  So what happens if they can't?  It is the norm for short sellers not to be making payments while the short sale is evaluated by the servicer, typically because they can't afford the payments. 

Subordinate Liens. 

No help for homeowners here.  Seconds and HELOCS  (Home Equity Lines of Credit) can and do kill deals and no real solution is offered in HAFA that I can see.  The Second will receive no more than $3,000 no matter how large the second and they are required to give a release of lien and full release of buyer liability.  It looks to me like this could actually put a borrower in a worse box in trying to do a short sale then they are without HAFA. 

Seconds frequently demand and get additional recovery in the form of cash or notes after closing.  This would preclude that.  Unless the government can force these terms on seconds, it seems to me HAFA could force many borrowers into foreclosure, particularly if they have a HELOC since the HELCO lender may determine they can collect more by forcing the foreclosure sale.

Mortgage Insurance Approval  

The prohibition against the Mortgage Insurer collecting anything will put the borrower in the same box as the treatment of subordinate liens.   Second lien holders can and do kill deals.  Why should they approve a deal where they get nothing?

See my Websites, The Davis-Resnick Group, LLC and my CDPE Site for additional information and resources on short sales, loan modifications, foreclosure and Deeds-in-lieu.

© Michael Davis 2010