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The HAFA is Hoping to Make Short Sales Uniform and Predictable for Buyers
Written by article default Tuesday, 15 June 2010 19:16
The Obama Administration is at it again, trying to help the housing market and troubled homeowners.The HAFA (Home Affordable Foreclosure Alternatives) program, first released in November of 2009 with an effective date of April 5th, 2010 (although participating lenders were free to adopt the program earlier), has been created to help bring uniformity, predictability and order to the short sale process.
In our Professional Real Estate Class, I cover short sale guidelines and how to create a short sale package; however, I'm always clear that once it gets to the lender, all bets are off. Different servicers follow different procedures and with a general lack of standards and/or accountability, no one can predict what will happen.
Now I don't expect that the imposition of HAFA rules will bring order to the system overnight. In fact, you're still going to be dealing with the same people and their level of competence (whatever that might be). But if the people who are on the buyer's side know and understand the rules, that can only help the process.
One of the biggest hurdles a short sale has to overcome is the cooperation of the participating parties, the biggest one being the junior lien holders.
Often a seller seeking a short sale will have more than one loan against the property. A typical example would involve a home now worth $200,000 that has a first mortgage of $250,000 and a second mortgage of $50,000. For the sale to occur, not only will the first mortgage holder have to take less than $250,000, but also the second mortgage holder will have to relinquish its lien holder status.
Why would the second mortgage holder consider doing this? For some, money as opposed to no money, is the answer. Now of course it will be less than the amount owed. The amount of money will be a matter of negotiation and that's where the short sale often finds a stopping point. As you can imagine, the junior lien holder wants to discount the note as little as possible, and the senior lien holder doesn't want the junior to benefit at its expense. The senior lien holder feels that every dollar that is paid on the junior lien is one it could have received for the senior lien.
Before HAFA, this is how the negotiations would go: The senior lien holder might say, "I won't allow more than $5,000 of the sale proceeds to go to the holder of the junior lien(s)." Whereas, the holder of the junior lien(s) might refuse to release the lien unless they receive $10,000. And around and around you can go.
This is how the HAFA program works. The first mortgage holder is given an incentive to allow the junior lien holder(s) (in aggregate) to be paid off up to a total of $6000, or 6% of the loan amount(s), whichever would be less. The senior lien holder can then receive a maximum of $2,000 from the Treasury for doing this.
Will 6 cents on the dollar be sufficient to persuade junior lien holders to write off their notes? The HAFA requires borrowers to receive a complete release of liability. 6 cents on the dollar is better than nothing, but more than a few junior lien holders might feel their notes are worth more; they may also find that others are willing to give them more than 6 cents on the dollar such as debt collectors who would be willing to pay 8 to 10 cents.
This is a large part of the home mortgage issue. The four major banks (Bank of America, Citibank, JP Morgan Chase and Wells Fargo) hold some $477 billion in junior liens. It will be interesting to see who will sign on to the program.
There have been changes, once again, in the Making Home Affordable Act. I'll go into these changes in a future article, however, I do want to point out that the Federal Economic Stability Agency reported that the program was vulnerable to fraud, and a new campaign to fight that fraud has come forth.