What is a short sale?
A short sale is a transaction in which the lender, or lenders, agrees to accept less than the mortgage amount owed by the current homeowner. In some cases, the lender forgives the difference, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt either by signing a note for the difference owed or through a court issued deficiency judgment afforded to the lender.
A short sale can also be the best option for homeowners who are “upside down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.
Home Affordable Foreclosure Alternative (HAFA)
How is the Home Affordable Foreclosure Alternative (HAFA) being implemented? (The Short Sale/Deed-In-Liu of Foreclosure)
Supplemental Directive 09-09 (November 30, 2009) gives servicers guidance for carrying out the program.
All servicers participating in HAMP must also implement HAFA in accordance with their own written policy, consistent with investor guidelines.
The policy may include such factors as the severity of the loss involved, local market conditions, the timing of pending foreclosure actions, and borrower motivation and cooperation. The servicer will send to the borrower a Short Sale Agreement (SSA) after determining the borrower is interested in a short sale and the property qualifies. It informs the borrower how the program works and the conditions that applies.
After the borrower contracts to sell the property, the borrower submits a Request for Approval of Short Sale (RASS) to the servicer within 3 business days for approval. If the borrower already has an executed sales contract and asks the servicer to approve it before an SSA is executed, the RASS is used instead. The Servicer must still consider the borrower for a loan modification.
How will HAFA improve the short sales process?
HAFA, complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home. HAFA uses borrower financial and hardship information already collected in connection with consideration of a loan modification under HAMP.
HAFA allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
As already stated, HAFA, prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
It also requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed). HAFA uses standard processes, documents, and timeframes/deadlines.
HAFA also provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 match for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for- three matching basis; up to 3% of the unpaid principal balance of each subordinate loan).
What are the timelines for HAFA?
Based on a servicer’s written policy, the servicer must consider every potentially eligible borrower for HAFA.
If a servicer has not already discussed a short sale or DIL with the borrower, it must notify the borrower in writing of these options and give the borrower 14 calendar days to respond, orally or in writing. If the borrower does not respond, that ends the servicer’s duty to give a HAFA offer.
Servicers must consider HAMP eligible borrowers for HAFA within 30 days after the borrower does at least one of the following:
1. Does not qualify for a HAMP trial period plan.
2. Does not successfully complete a HAMP trial period plan.
3. Is delinquent on a HAMP modification (misses at least 2 consecutive payments).
4. Requests a short sale or DIL.
The borrower has 14 calendar days from the date of the Short Sale Agreement to sign and return it to the servicer.
The Short Sale Agreement must give the borrower an initial period of 120 days to sell the house (extensions permitted up to a total of 12 months).
Within 3 business days of receiving an executed purchase offer, the borrower (or agent) must submit a completed RASS to the servicer, including (I) a copy of the sale contract and all addenda; (ii) buyer documentation of funds or pre-approval/commitment letter from a lender; and (iii) all information on the status of subordinate liens and/or negotiations with subordinate lien holders.
Within 10 business days after the servicer receives the RASS and all required attachments, the servicer must approve or deny the request and advise the borrower.
The servicer may require the closing to take place within a reasonable period after it approves the RASS, but not sooner than 45 days from the date of the sales contract unless the borrower agrees.
The servicer must release its first mortgage lien within 10 business days (or earlier if required by state or local law) after receipt of sales proceed from a short sale or delivery of the deed in the case of a DIL.
Investor must waive rights to seek deficiency judgment and may not require a promissory note for any deficiency.
What are the steps for evaluating a loan to see if it is a candidate for a SHORT SALE under HAFA?
Borrower solicitation and response
If the servicer has not already discussed a short sale or DIL with the borrower, the servicer must proactively notify the borrower in writing of the availability of these options and allow the borrower 14 calendar days from the date of the notification to contact the servicer by verbal or written communication and request consideration under HAFA. If the borrower fails to contact the servicer within the timeframe or at any time indicates that he or she is not interested in these options, the servicer has no further obligation to extend a HAFA offer.
Use of borrower financial information from HAMP (May require updates or documentation.)
When does the program end?
Short Sale Agreements must be executed and returned to the servicer no later than 12/31/2012.
An Overview: "Making Home Affordable"
The Making Home Affordable Program (MHA) is part of President Obama Administration's broad, comprehensive strategy to get the economy and the housing market back on track. The Making Home Affordable Program offers several options for homeowners: (a) refinancing mortgage loans through the Home Affordable Refinance Program (HARP), (b) modifying first and second mortgage loans through the Home Affordable Modification Program (HAMP) and the Second Lien Modification Program (2MP), providing temporary assistance to unemployed homeowners through the Home Affordable Unemployment Program (UP), and (c) offering other alternatives to foreclosure through the Home Affordable Foreclosure Alternatives Program (HAFA)
Foreclosure Alternatives and Home Price Decline Protection Initiative
On May 14, 2009, the Obama Administration announced its Foreclosure Alternatives Program. Among other things, the new program: Establishes financial incentives for servicers, sellers, and second lien holders to encourage the completion of short-sale transactions.
Foreclosure Alternatives will help to prevent costly foreclosures by providing incentives for servicers and borrowers to pursue short sales and deeds-in-lieu of foreclosure in cases where a borrower is eligible for a Making Home Affordable Program modification but unable to complete the modification process. This program will assist homeowners who cannot afford to stay in their homes by helping them to avoid foreclosure and relocate to a home they can afford.
The program requires that a timeline, of no fewer than 90 days, be set to allow a homeowner to sell a home, without threat of foreclosure action.
The program also requires the short sale agreement to specify reasonable and customary real estate commissions and costs to be deducted from the sales prices. The servicer must agree not to negotiate a lower commission after receiving an offer and provide standardized documents, including short-sale agreements and offer acceptance letters.
The “initiative”, also encourages a streamlined process combining short sales and Deeds-In-Lieu transactions to facilitate foreclosure prevention alternatives, financial initiatives for servicers to pursue alternatives to foreclosures, and borrowers incentives to cover relocation expenses to homes that are affordable.
How the Home Affordable Foreclosure Alternative Short Sale/ Deed-In-Liu Program Works:
Borrowers will be eligible for the Foreclosure Alternative Program if they meet the minimum eligibility criteria for a Home Affordable Modification but did not qualify for a modification or were unable to sustain payments under a trial period plan or a modification. Prior to proceeding to foreclosure, participating servicers must evaluate each eligible borrower to determine if a short sale is appropriate.
The borrower must meet the basic eligibility criteria:
- The property must be a principal residence.
- The first mortgage must have been originated before 2009.
- The mortgage must be delinquent or default is reasonably foreseeable.
- The unpaid principal balance of the loan may be no more than $729,750 (higher limits for 2 to 4 unit dwellings).
- If the Borrower’s total monthly payment exceeds 31% of gross income, then the customer qualify for the short sale program.
Considerations in the determination include property condition and value, average marketing time in the community where the property is located, the condition of the title including the presence of junior liens and a determination that the net sales proceeds are expected to exceed the investor's recovery through foreclosure Incentive Payments.
Servicers may receive incentive compensation of up to $1,000 for successful completion of a short sale or DIL. Borrowers may receive incentive compensation of up to $1,500 to assist with relocation expenses.
Treasury will also share the cost of paying junior lien holders to release their claims, matching $1 for every $2 paid by the investors, up to a total contribution of $1,000 by Treasury.
Eligible borrowers will be accepted until December 31, 2012. Program payments will be made upon successful completion of a short sale or DIL.
Home Affordable Refinance Program (HARP)
Additionally, the Home Price Decline Protection Incentives to Protect Against Falling Home Prices support modifications in markets hardest hit by falling home prices by providing incentives for modifications by providing payments based on recent declines in home prices to reduce the risk of loss to lenders from modifications compared to alternatives that could result in the loss of homeownership.
Through a refinance under HARP, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans to eligible homeowners who are current on their mortgages but have been unable to take advantage of todays lower interest rates because their homes have decreased in value, may now have the opportunity to refinance.
Eligibility criteria for a refinance under HARP
A Borrower may be eligible if:
1. They are the owner-occupant of a one- to four-unit home.
2. The loan on the property is owned or guaranteed by Fannie Mae or Freddie Mac
3. If at the time of the application, the Borrower is current on the mortgage payments ("Current" generally means that the Borrower has not been more than 30 days late on the mortgage payment in the last 12 months; or, if the Borrower has had the loan for less than 12 months and never missed a payment).
4. The amount owed on the first lien mortgage does not exceed 125% of the current market value of your property. You have a reasonable ability to pay the new mortgage payments.
5. The refinance improves the long term affordability or stability of your loan.
The objective of a refinance under HARP is to provide creditworthy homeowners who have shown a commitment to paying their mortgage on time the opportunity to get into a new mortgage with better terms.
Homeowners whose mortgage interest rates are much higher than the current market rate, Homeowners who are paying interest only loans, Homeowners who have a low introductory rate that will increase in the future, or who face a balloon payment may not see their current payment go down if they refinance to a fixed rate and payment. These Homeowners, however, could save a great deal of money by reducing the amount of interest they pay over the life of the loan.
The interest rate will be based on market rates in effect at the time of the refinance and the homeowner will be subject to any associated points and fees quoted by your lender. The refinanced loans must have no prepayment penalties or balloon payments.
Under HARP the Borrower will not receive cash on the refinance for the purpose of paying other debts nor the amount of the loan would not be reduced any other debt you owe; the objective of a refinance under HARP is to help homeowners get into a more stable fixed-rate loan product and avoiding future mortgage payment increases and improve their ability to sustain their mortgage payments over the long-term.
To apply for a HARP loan, a borrower must submit the following information:
- Information about the monthly gross (before tax) income of all the homeowners on the loan including recent pay stubs if you receive them, or documentation of income you receive from other sources
- The most recent income tax return
- Information about any junior lien mortgage on the property
- Account balances and minimum monthly payments due on all of your credit cards
- Account balances and monthly payments on all your other debts such as student loans and car loans
The program expires on June 10, 2011. In order to refinance under HARP the Borrower must have a mortgage note date on or before that date.
At the servicer’s option, the Short Sale Agreement may include a condition that the borrower agrees to deed the property to the servicer in exchange for a release from the debt if the property does not sell within the time specified in the Agreement or any extension thereof. In this case the borrower would have 30 days to vacate the property and would be entitled to $1,500 to assist with relocation expenses, in addition to any other funds the servicer may provide to the borrower.
Home Affordable Modification Program (HAMP)
Foreclosure Alternatives for Borrowers Eligible for the Home Affordable Modification Program (HAMP) but unable to qualify for a modification:
For eligible borrowers unable to retain their homes, HAMP will provide incentives to borrowers, servicers and investors to encourage short sales and deeds-in-lieu. Both allow families and servicers to avoid the costly foreclosure process, and to minimize the negative impact of foreclosures on borrowers, financial institutions and communities.
Short Sales/Deeds-In-Lieu Program to Facilitate Foreclosure Alternatives
When a borrower meets the eligibility requirements for a Home Affordable Modification Program (HAMP) but does not qualify for a modification or cannot maintain payments during the trial period or modification, the servicer may consider a short sale, and if that is unsuccessful, a Deed- In-Lieu (DIL).
Both a short sale and a DIL provide an opportunity for borrowers and servicers to avoid the foreclosure process. In a short sale, a servicer allows the borrower to sell the property at its current value, even if the sale nets less than the total amount owed on the mortgage. Approval of a short sale requires the borrower to list and actively market the home at its fair value.
The sale must be an arms length market transaction with all proceeds (after selling costs) applied to the discounted mortgage payoff. If the borrower actively markets the property but is unable to sell it within the agreed upon time period, a servicer may consider a DIL. With a DIL, the borrower voluntarily transfers ownership of the property to the servicer – provided the title is free and clear.
Short sales and DILs are complex transactions involving careful coordination and close cooperation among a number of parties -- servicers, appraisers, borrowers, purchasers, real estate brokers, and title agencies and often mortgage insurance companies and junior lien holders. A short sale or DIL usually provides a better outcome for borrowers, investors and communities. However, due to the complexity of and time required for completion of these transactions, servicers historically have often opted to pursue foreclosure instead, even where a short sale or DIL would have provided a substantially better outcome for borrowers, investors and communities.
The MHA Foreclosure Alternatives Program simplifies and streamlines the short sale and DIL process by providing a standard process flow, minimum performance timeframes and standard documentation. To compliment a standardized approach, Treasury provides incentives to borrowers, servicers and investors to pursue short sales and DILs.
HAMP 2 - Second Mortgage (Lien) Modification Program (2MP)
The Second Mortgage Modification Program (2MP) is designed to work in combination with the Home Affordable Modification Program (HAMP). Together, HAMP and 2MP create a broad solution to help homeowners achieve affordability by lowering payments on both the 1st and 2nd mortgages.
Under 2MP, when a homeowner’s 1st mortgage is modified under HAMP and the servicer of the 2nd mortgage is a 2MP participant, that servicer must offer to modify or provide some level of reduction or modification on the borrower’s second mortgage. The 2MP offer will be made in dependence on the financial information provided by the homeowner in combination with the HAMP modification and without additional evaluation by the second mortgager servicer.
At this time, Citi, Bank of America, Wells Fargo, and Chase are participating in the Second Lien Modification Program.
The Home Affordable Unemployment Program (UP)
The Home Affordable Unemployment Program (UP) provides homeowners forbearance, which is a temporary period of time during which your regular monthly mortgage payment is reduced or suspended. This program will be available on or before July 1, 2010 to eligible unemployed homeowners through participating HAMP servicers.
Visit MakingHomeAffordable.com/contact_servicer.html to find out if your servicer is a program participant and when they will make up available to homeowners.
Participating servicers are required to offer an UP forbearance plan to the borrower under the following minimum eligibility criteria:
The mortgage loan is secured by a one- to four-unit property, one unit of which is the Borrowers principal residence.
- The mortgage loan is a first mortgage loan originated on or before January 1, 2009.
- The current unpaid principal balance of the mortgage loan is equal to or less than $729,750.
- The mortgage loan is delinquent, or default is reasonably foreseeable.
- The mortgage loan has not been previously modified under HAMP, and you have not previously received an UP forbearance period.
In order to be eligible, the Borrower must also:
- Request that your servicer consider you for UP before three full mortgage payments are due and unpaid.
- Be unemployed when you request consideration for UP, and be able to document that you will receive unemployment benefits in the month of the forbearance period effective date.
- Your servicer may require that you have been on unemployment benefits for up to three months before your forbearance period can begin.
Note: Visit MakingHomeAffordable.com/contact_servicer.html to find out if the particular servicer is a program participant.
To apply for UP program, the Borrower must contact their loan servicer either by mail, phone or request a UP forbearance plan; keep in mind that, the servicer must be a participating HAMP servicer in order to offer the program.
During the UP forbearance period, the monthly mortgage payment must be reduced to no more than 31 percent of the Borrowers gross monthly household income. However, the Borrower must make these payments in a timely manner so as not to jeopardize their eligibility. Please note that the UP forbearance period is at least three months long. It can be extended, however, depending on investor and regulatory guidelines.
If the Borrower gets a new job during the forbearance period, the servicer must be notified. Then; 30 days before the forbearance period expires, the servicer will provide the Borrower with an Initial Package so they can request a modification through the Home Affordable Modification Program (HAMP).
Note: UP can only be applied to a first mortgage.
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