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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2010

Using HAFA to Promote Short Sales

Want niche clientele? Get to know this government program

The U.S. Department of the Treasury's Home Affordable Foreclosure Alternatives (HAFA) program intends to make short sales more enticing for homeowners, homebuyers, lenders and others. The program should help reduce complaints about short sales' often-lengthy transaction times, unclear expectations and inconsistent processes.

Mortgage brokers who educate themselves and their clients about HAFA can use the program to build their business in the short-sale niche.

About HAFA

HAFA supplements the Home Affordable Modification Program (HAMP), designed to help troubled homeowners modify their mortgage payments, and offers help to borrowers who don't meet HAMP's requirements for a mortgage modification. The HAFA guidelines took effect this past April and are scheduled to run through 2012.

"Many mortgage brokers have avoided working with short-sale purchases because of long response times from lenders or servicers and a lack of preapproved terms."

HAMP and HAFA are voluntary programs for which servicers must sign up. As of press time, the servicers enlisted accounted for 89 percent of outstanding mortgage debt nationwide.

Short sales occur when lenders agree to accept a purchase offer for less than the current borrowers' total amount owed to pay off a home. Many mortgage brokers have avoided working with short-sale purchases because of long response times from lenders or servicers and a lack of preapproved terms. Despite having willing sellers and buyers, many attempted short sales never materialize because lien-holders can't efficiently negotiate the sale. In response to substantially delayed time frames, potential sellers or buyers often walk away.

There are, however, several reasons HAFA should make short sales more enticing. Brokers who understand these can facilitate short sales, connect new buyers to purchase loans and establish an important niche in today's market.

Some of the HAFA enticements include:

  • Preapproved terms and required response times;
  • Less-severe credit damage when compared with foreclosure; and
  • $3,000 in moving expenses for sellers.

In addition, lenders or servicers can receive a $1,500 payment for administrative costs (or $2,200 when working with Fannie Mae or Freddie Mac loans), and investors can receive as much as $2,000 on a one-for-three matching basis for allowing junior lien-holders to be paid as much as $6,000. For each $3 an investor pays to a subordinate lien-holder, the investor will receive $1 of reimbursement.

Lien-holders and private mortgage insurers involved in HAFA short sales must waive their rights to collect any other contribution, promissory note or deficiency judgment. Despite this, the aforementioned incentives should make short sales more attractive and expedite the process.

Requirements

Along with requiring preapproved terms from lenders or servicers, HAFA's expectations regarding payment amounts to junior-lien-holders -- and the government reimbursement provided to investors for making that payment -- probably will have the largest impact in improving short-sale success rates. Subordinate-lien-holders have been one of largest obstacles to productive and quick negotiations. They often make unreasonable demands and refuse to budge. Junior-lien-holders, however, still must approve short sales.

In addition, here are some other requirements that should clarify and expedite HAFA short sales:

  • Lenders and servicers must determine and provide the minimum net proceeds and provide a short-sale agreement defining all the key terms, including allowable transaction costs and real estate commission.
  • Sellers must present a request for short-sale approval within three days of receipt of an executed purchase offer.
  • Lenders or servicers must approve or deny the short sale within 10 business days.
  • Lenders or servicers cannot require the transaction to close in less than 45 calendar days from the date of the sales contract without borrower approval.

Servicer execution has been one of the largest reasons for failed short sales. Many servicers have systems, employees and processes in place to service loans and mitigate losses inexpensively and efficiently during times of significant home-price appreciation. On the other hand, servicers often are understaffed and lack employees with holistic industry knowledge who can help distressed homeowners exit their mortgage obligations gracefully.

Communication

Mortgage brokers working with HAFA short sales can ensure the preapproved terms are complete. In addition, all parties must receive the terms, which the lender and servicer must approve.

Brokers also can diligently pursue loan approval for the new buyers within the confines of the preapproved short-sale terms. Although servicers are expected to respond within 10 days, that will be a challenge for many because of chronic understaffing. Avoiding back-and-forth negotiations will be important. Maintaining clear lines of communication also can help brokers facilitate negotiations between all parties.

Although HAFA should encourage and improve many short sales, it won't ensure success. Servicers and troubled homeowners must be organized and move quickly to avoid derailing transactions.

All things considered, the overall success rate of short sales should improve in response to HAFA. Mortgage brokers with a solid grasp of the guidelines, a commitment to communication and deal facilitation, and a well-rounded understanding of short sales should find new avenues to grow and market their business.


 


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