The Home Affordability Modification Program(“HAMP”) has been largely unsuccessful in creating permanent loan modification solutions that allow distressed homeowners to remain in their properties. In response, the Home Affordable Foreclosure Alternatives Program (“HAFA”), which went into effect April 5, 2010, provides foreclosure avoidance options for homeowners who are not able to permanently modify their loans to manageable levels. Homeowners can now sell or convey their property at market value through a standardized set of processes, with pre-defined results, even if they owe more on their mortgages than the property may be worth.
While over one million homeowners have started trial loan modification programs under HAMP, only approximately 116,000 have received permanent loan modifications. If permanent loan modification under HAMP is unsuccessful or impossible, HAFA provides an alternative for borrowers to avoid losing their house to foreclosure.
HAFA offers homeowners two primary foreclosure alternatives:
- Short Sale. A short sale allows the homeowner to sell the property for less than the total amount due on the mortgages against the property. Acceptance of a short sale through HAFA results in full satisfaction of the total amount due on the first mortgage.
- Deed-in-Lieu of Foreclosure. In a deed-in-lieu of foreclosure (“DIL”), the homeowner conveys clear and marketable title to the property back to the loan servicer in exchange for full satisfaction of the first mortgage obligation. Servicers will likely require homeowners to attempt to sell the property via short sale prior to accepting a DIL.
The key change with the implementation of HAFA is the requirement that first lien holders must completely forgive any post-short sale or DIL deficiencies, meaning borrowers cannot be pursued for deficiency judgments if the proceeds from the sale of the property are not sufficient to pay off the loan obligation.
- HAMP Modification Evaluation. The servicer must first determine whether the borrower qualifies for a modification under HAMP, which would allow the borrower to stay in the property by making reduced monthly payments. Borrowers become eligible for HAFA if they meet the eligibility criteria for HAMP, but are not offered the opportunity to modify their loan or cannot complete the terms of their modification.
- HAFA Commencement. HAFA evaluation starts by the borrower requesting a short sale or a DIL, or by the servicer contacting the borrower about the same if the borrower defaults on a HAMP modification program. The borrower’s hardship and financial data submitted during HAMP consideration will be re-verified to ensure continued qualification. The servicer then evaluates title work and orders an appraisal or Broker’s Price Opinion (“BPO”) to determine the market value of the property.
- Short Sale Request. Prior to approving a borrower to participate in a HAFA short sale, the servicer and lender must, based on a standard written policy, determine the minimum net proceeds sufficient to accept the proposed transaction. This gives borrowers the certainty of knowing what they must sell the property for in order to obtain lender approval, and changes the typical process of needing a contract to purchase before being able to obtain short sale approval terms. The servicer will provide the borrower with a standard set of short sale terms, and agrees to postpone any foreclosure proceedings while the borrower is being considered for a HAFA solution.
- Offer to Purchase. Upon receipt of an offer to purchase, the borrower submits the offer with a completed HAFA Request for Approval of a Short Sale (“RASS”). Servicers must issue approval or disapproval of the sale within 10 days of receiving the RASS and contract to purchase. Buyer and seller will be permitted at least 45 days after approval to close on the transaction.
- Junior Liens. Servicers may allocate up to $3,000 to junior lien holders to release the junior lien. Investors are reimbursed up to $1,000 for funds paid to secure junior lien release. And here’s the kicker: If the junior lien is with an institution that participates in HAFA, that lender must accept the $3,000 maximum proceeds as full and final satisfaction of the borrower’s obligation to repay the junior lien.
- Deed-In-Lieu. Servicers may offer a DIL as a short sale alternative, or in the event a short sale is unsuccessful. In order for a DIL conveyance to be permitted under HAFA, the borrower must agree to convey marketable title to the servicer pursuant to a written agreement that specifies, among other things, a date for the homeowner to vacate the property and surrender possession.
- Post-Sale or Transfer. Following a successful short sale closing or DIL conveyance, borrowers are provided a $3,000 incentive to assist with relocation expenses.
The new HAFA program provides foreclosure alternatives for homeowners who are unable to permanently modify their mortgage loans through HAMP. HAFA standardizes the short sale and deed-in-lieu processes, ensures that borrowers will not be liable for deficiencies on first mortgages if successful in the program, and increases the likelihood that borrowers will also not be liable on post-transaction junior lien deficiencies.
Borrowers who are unable to permanently modify their mortgage through HAMP can now avoid foreclosure through the HAFA short sale or deed-in-lieu of foreclosure programs, which provide standardized processes and guidelines for homeowners to convey their property at market value, even though market value may be less than the full amount owed on the loans.