Do You HAFA? The HAFA Short Sale Program under Making Home Affordable 2

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1 Table of Contents Do You HAFA? The HAFA Short Sale Program under Making Home Affordable 2 INTRODUCTION 2 Overview: Making Home Affordable ( MHA ) 2 HOME AFFORDABLE FORECLOSURE ALTERNATIVES PROGRAM ( HAFA ) _ 3 Background 3 Foreclosure Alternatives: Short Sale and Deed-in-Lieu of Foreclosure 3 Overview and Eligibility for HAFA 4 Qualifying factors for HAMP 4 Qualifying factors for HAFA 4 Benefits of a HAFA Short Sale or DIL 5 The SSA must include (among other things): 5 Deed in Lieu 6 The Three Faces of HAFA 6 HAFA Caveats 8 Beware of Unlicensed Short Sale Negotiators 9 Mortgage Insurer Approval 9 Tax Liability 9 Credit Reporting 9 Junior Lienholders & Deficiencies 9 HAFA Resources 10 LYNN ARENDS ATTORNEY & MANAGING BROKER Page 1

2 Do You HAFA? The HAFA Short Sale Program under Making Home Affordable INTRODUCTION I am both an Attorney and Managing Broker (Realtor). Most of my law practice involves negotiating debt and advising borrowers on foreclosure, deed-in-lieu, bankruptcy, short sales and loan modifications. As a Realtor, I am predominantly a Listing Agent and most of my listings are short sales. I start with a thorough two-hour consultation. No one gets to see me as a Realtor until they first see me as a lawyer. This is very important because more often than not, a short sale is not the answer. Thus, no discussion about short sales would be complete without first discussing the alternatives, and with so many homeowners struggling right now, a good place to start is with some of the Federal help available under the government s Making Homes Affordable Program which offers refinancing, loan modifications, short sales and deed-in-lieu options for homeowners. Overview: Making Home Affordable ( MHA ) The Making Home Affordable Program is part of the Obama Administration's broad, comprehensive strategy to get the economy and the housing market back on track. The Making Home Affordable Program offers strong options for homeowners: (1) refinancing mortgage loans through the Home Affordable Refinance Program ( HARP ), (2) modifying first and second mortgage loans through the Home Affordable Modification Program ( HAMP ) and the Second Lien Modification Program ( 2MP ), (3) providing temporary assistance to unemployed homeowners through the Home Affordable Unemployment Program ( UP ), and (4) offering other alternatives to foreclosure through the Home Affordable Foreclosure Alternatives Program ( HAFA ). Making Home Affordable Borrower FAQs: LYNN ARENDS ATTORNEY & MANAGING BROKER Page 2

3 HOME AFFORDABLE FORECLOSURE ALTERNATIVES PROGRAM ( HAFA ) Background On November 30, 2009, the Treasury Department introduced the HAFA program to provide a viable option for homeowners who are unable to keep their homes through the existing Home Affordable Modification Program ( HAMP ). HAFA and HAMP are both part of the government s Making Home Affordable program and HAFA provides financial incentives to servicers and borrowers who utilize a short sale or a deed-in-lieu to avoid a foreclosure on an eligible loan under HAMP. The HAFA program took effect on April 5, 2010 for non-gse mortgage lending (i.e., loans not sold to Fannie Mae and Freddie Mac or FHA/VA insured loans) and on August 1, 2010 for Fannie Mae and Freddie Mac. The HAFA program sunsets on December 31, On March 26, 2010, Supplemental Directive 09-09R replaced in its entirety Supplemental Directive and increased the financial incentives: $3,000 for borrower relocation assistance; $1,500 for servicers to cover administrative and processing costs; and up to $2,000 match for investors for allowing a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis; up to 6% of the unpaid principal balance of each subordinate loan). With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower. Foreclosure Alternatives: Short Sale and Deed-in-Lieu of Foreclosure In a short sale, the servicer allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the mortgage. The short sale must be an arm s length transaction with the net sale proceeds (after deductions for reasonable and customary selling costs) being applied to a discounted ( short ) mortgage payoff acceptable to the servicer. The servicer accepts the short payoff in full satisfaction of the total amount due on the first mortgage. In a deed-in-lieu of foreclosure (DIL), the borrower voluntarily transfers ownership of the mortgaged property to the servicer in full satisfaction of the total amount due on the first mortgage. The servicer s willingness to approve and accept a DIL is contingent upon the borrower s ability to provide marketable title, free and clear of mortgages, liens and encumbrances. Generally, servicers require the borrower to make a good faith effort to sell the property through a short sale before agreeing to accept the DIL. However, under circumstances acceptable to the investor, the servicer may accept a DIL without the borrower first attempting to sell the property. With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower. LYNN ARENDS ATTORNEY & MANAGING BROKER Page 3

4 Before getting too excited, know that there is conditioning language throughout Supplemental Directive 09-09R giving lenders wide latitude as to when and if relief will be offered. Overview and Eligibility for HAFA First, look at HAMP. HAMP is intended to allow distressed borrowers to modify their loan and retain home ownership. Qualifying factors for HAMP 1. Borrowers principal residence, 2. Loan originated prior to 01/01/2009 (1st lien only), 3. Current loan balance less than $729,750, 4. Mortgage is delinquent or default is foreseeable, and 5. The borrower s total monthly mortgage payments (including taxes and insurance) exceed 31% of the borrower s gross income. HAMP intended to provide borrowers the ability to modify existing loans. However, if that is not possible or if the borrower fails to repay the modified loan, then the borrower may consider selling short or surrendering the property through a deed in lieu of foreclosure, pursuant to HAFA. Eligible borrowers must be evaluated for a HAMP mortgage modification before moving to the HAFA alternative. Qualifying factors for HAFA Pursuant to the servicer s policy, every potentially eligible borrower must be considered for HAFA before the borrower s loan is referred to foreclosure or the servicer allows a pending foreclosure sale to be conducted. Servicers must consider possible HAMP eligible borrowers for HAFA within 30 calendar days of the date the borrower: 1. Does not qualify for a Trial Period Plan; 2. Does not successfully complete a Trial Period Plan; 3. Is delinquent on a HAMP modification by missing at least two consecutive payments; or 4. Borrower requests a short sale or DIL. Currently, a significant risk for any short sale seller is that seller s lender may require seller to remain liable for the deficiency. With either the HAFA short sale or DIL, the lender may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower. A HAFA alternative must be considered before a lender can foreclose on a borrower. LYNN ARENDS ATTORNEY & MANAGING BROKER Page 4

5 Benefits of a HAFA Short Sale or DIL Allows the borrower to receive pre-approved short sale terms prior to the property listing. Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement (up to 6%). Requires that borrowers be fully released from future liability for the debt. Uses standard processes, documents and timeframes. Provides financial incentives to borrowers, servicers and investors. Currently, two significant logistical problems in any short sale transaction, is the length of time required to gain lender approval and the inconsistency of documentation from one lender to another. The HAFA short sale process employs standard form documents and defined performance timeframes to facilitate clear communication between the parties to the listing and sale transaction. Servicers must adhere to the following guidelines in connection with the issuance of a Short Sale Agreement ( SSA ): Lender must determine minimum acceptable net proceeds; Lender must determine allowable transaction costs; Lender and borrower must execute a HAFA Short Sale Agreement. The SSA must include (among other things): 1. A fixed termination date not less than 120 calendar days from the effective date of the SSA; 2. A requirement that the property be listed with a licensed real estate professional doing business in the community; 3. Either a list price approved by the servicer or the acceptable sale proceeds, expressed as a net amount after subtracting allowable costs; 4. The amount of closing costs or other expenses the servicer will permit; 5. The amount of commission that may be paid, not to exceed 6%; 6. Notice that sale must represent an arm s length transaction and that the purchaser may not sell the property within 90 calendar days of closing; 7. An agreement that upon successful closing the borrower will receive relocation incentive of $3,000, deducted from gross sale proceeds; 8. Notice that the lender will allow a portion of gross sale proceeds to be paid to subordinate lien holders in exchange for release and full satisfaction of their liens; 9. Amount of partial mortgage payment that borrower may be required to pay during term of SSA, which must not exceed 31% of borrower s gross income; 10. Agreement that during SSA, lender will not foreclose. Note that at any time, the SSA can be terminated for bad faith, borrower s financial recovery, and breach by borrower or listing agent, etc. LYNN ARENDS ATTORNEY & MANAGING BROKER Page 5

6 When seller finds a buyer, seller must submit to the lender: 1. A copy of the executed sales contract and all addenda; 2. Buyer s documentation of funds or pre-approval; 3. All information regarding status of subordinate liens and/or negotiations. Lender has 10 days to approve and must approve sale with net proceeds at or above minimum. Lender cannot require closing in less than 45 days. Up to $6,000 total, can be paid to junior lienholders who discharge all remaining debt. Deed in Lieu If property does not sell, SSA may be extended or DIL may be considered. In a deed-in-lieu of foreclosure (DIL), the borrower voluntarily transfers ownership of the mortgaged property to the servicer in full satisfaction of the total amount due on the first mortgage. The servicer s willingness to approve and accept a DIL is contingent upon the borrower s ability to provide marketable title, free and clear of mortgages, liens and encumbrances. Generally, servicers require the borrower to make a good faith effort to sell the property through a short sale before agreeing to accept the DIL. However, under circumstances acceptable to the investor, the servicer may accept a DIL without the borrower first attempting to sell the property. With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower. The Three Faces of HAFA 1. Treasury Version (Non-GSE loans) 2. Fannie Mae Program 3. Freddie Mac Program In June 2010, both Fannie Mae and Freddie Mac released guidelines for their HAFA programs to begin no later than August 1, Below is an outline detailing some of the major differences between the HAFA guidelines for GSE and non-gse loans in the areas of eligibility, borrower s limits on cash reserves, incentives paid to servicers, borrowers and junior lienholders, maximum allowable transactions costs & commissions, Private Mortgage Insurance (PMI), determination of the subject property s list price and rules surrounding the extension of the Short Sale Agreement ( SSA ). LYNN ARENDS ATTORNEY & MANAGING BROKER Page 6

7 Treasury Fannie Mae Freddie Mac Eligibility Meet HAMP threshold requirements Meet HAMP threshold At imminent risk of default Meet HAMP threshold More than 60 days delinquent Cash Reserves Cash reserves not specified, though the investor may have a limit Borrowers who have the ability to pay but choose not to (strategic default) are ineligible Cash reserves must be less than the greater of $5,000 or 3x the current monthly payment Cash reserves must be less than the greater of $5,000 or 3x the current monthly payment Incentives Borrower receives $3,000 for moving costs Servicer receives $1,500 for short sale or DIL administrative and processing costs Servicer pays up to $6,000 for all junior liens (6% of any one lien) and Treasury pays 1/3 up to $2,000 as reimbursement to servicer Same as Non-GSE loans, except servicer incentive is $2,200 for a short sale Same as Non-GSE loans, except servicer incentive is $2,200 for a short sale Maximum Transactions Costs & Commissions Reasonable and customary as specified in the SSA. No cap, though the investor could require a max, listed as either a percentage or an amount. The servicer may not require that the commission be reduced to less than 6% of the sales price. Will pay the commission up to 6% of the final sales prices. LYNN ARENDS ATTORNEY & MANAGING BROKER Page 7

8 Private Mortgage Insurance (PMI) PMI must approve and must release borrower from deficiency claims Working to engage MI companies to get blanket authority or delegated authority with some conditions. Working to engage MI companies to get blanket authority or delegated authority with some conditions. Determination of List Price List price is determined based on minimum net proceeds required, as set by the servicer. Servicer will work with the real estate broker & borrower to list the property for fair market value, taking into consideration the allowable minimum net proceeds. Servicer provides minimum list price. Real estate broker and borrower decide actual list price necessary to obtain final sale at minimum price. Extension of Short Sale Agreement (SSA) Owner has 120 days from date of shortsale solicitation to sell the house, at which point a DIL action is initiated. Servicer may extend to a total of 12 months maximum. The minimum marketing period for a property subject to a HAFA SSA is 120 days. Extension may be submitted to Fannie Mae for approval. Initial SSA term is 120 days from the date the SSA is sent to the borrower. Servicer may request Freddie Mac permission to extend it no later than 15 days prior to the expiration of the term. Sales prices, marketing strategy, and choice of broker will be reassessed if the term is extended. HAFA Caveats Fannie Mae is the Program Administrator and the Treasury Department has selected Freddie Mac as its Compliance Agent to provide regulatory oversight. So we ve got Freddie auditing Fannie! LYNN ARENDS ATTORNEY & MANAGING BROKER Page 8

9 Beware of Unlicensed Short Sale Negotiators Remember, DOL says that ALL short sale negotiators must have either a real estate license, a mortgage broker s license or a law license. Don t refer or participate with any unlicensed short sale negotiator. (Remember Jackowski!) Mortgage Insurer Approval For loans that have mortgage insurance coverage, the servicer/investor must obtain mortgage insurer approval for HAFA foreclosure alternatives. A mortgage loan does not qualify for HAFA unless the mortgage insurer waives any right to collect additional sums (cash contribution or a promissory note) from the borrower. Tax Liability Even if HAFA eliminates obligation to repay deficiencies to lender(s) in a short sale, remember that tax liability may still exist. Under the Mortgage Debt Relief Act of 2007, if forgiven debt is from an equity refinance used for anything other than improvement of foreclosed property, forgiven debt is taxed as income. (See IRS Publication 4681 for additional information). Credit Reporting The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment which may hurt credit scores. Junior Lienholders & Deficiencies This is a HUGE caveat! To receive an incentive, subordinate lien holders must agree to release their liens and waive all future claims against the borrower. The servicer is not responsible for any future actions or claims against the borrower by such subordinate lien holders or creditors. According to Supplemental Directive 09-09R, Release of Subordinate Liens: The servicer, on behalf of the investor, will authorize the settlement agent to allow a portion of the gross sale proceeds as payment(s) to subordinate mortgage/lien holder(s) in exchange for a lien release and full release of borrower liability. Each lien holder, in order of priority, may be paid no more than six percent (6%) of the unpaid principal balance of their loan, until the $6,000 aggregate cap is reached. Regarding the release of subordinate liens, how do you reconcile the above language from the Supplemental Directive with the language below in the Short Sale Agreement (SSA) that borrowers must sign? LYNN ARENDS ATTORNEY & MANAGING BROKER Page 9

10 For the HAFA Short Sale: If there are such liens, you will need to either pay these loans off in full or negotiate with the lien holders to release them before the closing date. Under this program, you must make sure other lien holders will agree not to pursue other legal action related to the pay off of their lien, such as a deficiency judgment. You can get help from your broker to negotiate with the other lien holders. For a Deed-in-Lieu under HAFA: We require each subordinate lien holder to release you from personal liability for the loans in order for the sale to qualify for this program, but we do not take any responsibility for ensuring that the lien holders do not seek to enforce personal liability against you. Therefore, we recommend that you take steps to satisfy yourself that the subordinate lien holders release you from personal liability. HAFA Resources Official Home Affordable Foreclosure Alternative website (administered by Fannie Mae) Making Home Affordable web site for consumers: The complete list of lenders who participate in both HAMP & HAFA programs is available at: HAFA Supplemental Directive Revised: HAMP Web site for loan servicers: Fannie Mae: Freddie Mac: National Association of Realtors LYNN ARENDS ATTORNEY & MANAGING BROKER Page 10