Changes in HAFA Short Sales
The treasury revised the regulations for the Home Affordable Foreclosure Alternative (HAFA) short sales December 28, 2010 with mofications that were effective February 1, 2011. These regulations do not apply to loans owned by Fannie Mae, Freddie Mac or insured by FHA, VA or USDA. In other words, the rules apply to everyone except the government. I find it entertaining that the government makes these rules that apply to everyone except the government.
The revisions appear to be in response to the fact that few HAFA short sales were approved in 2010, so the regulations made it easier to qualify. The regulations still limit HAFA to loans originated before 2009, so recently refinanced loans do not qualify. Also, the loan amount of the loan has to be $729,750 (which does not apply to Fannie Mae and Freddie Mac HAFA’s, but those are “different animals”). To increase the numbers of HAFA short sales, the requirement that the mortgage payment exceed 31% of the borrower’s gross income was eliminated. HAFA was created to be a follow up to the Home Affordable Modification Program (HAMP), so that people who could not get their problems worked out with a HAMP modification could pursue a HAFA short sale. HAMP has the 31% requirement. Now, HAFA is not restricted by that.
HAFA applies to the borrower’s principal residence, not to second homes or investment property. The former HAFA rules severly restricted the number of people who could qualify if the borrower had moved out of the property because the property could only be unoccpied (by the borrower) for up to 90 days AND the borrower had to move over 100 miles for work. That is all out the window with the new rules. The property can be vacant or rented to someone else for up to a year. There is no requirement for how far away the borrower moved. These time limits are for the time up to the date of the Short Sale Agreement (SSA) or the Alternative Request for Approval of Short Sale (Alternative RASS).
The former regulations limited the payments to the junior lien holders to 6% of the outstanding balance. So, a second loan of $20,000 could receive a maximum of $1,200. That was a problem because most lenders in second position would not settle for less than 10%. The 6% limit has been discarded by the new regulations. The total of the payments to all the junior lien holders is limited to a total of $6,000, but there is no limit on what percentage of the loan is paid. The investor that owns the first loan still gets an incentive payment from the Treasury of one third of the amount that they allow to be paid to the junior lien holders. So, the investor will receive $2,000 if they allow the second and third loans to have payment that add up to $6,000. (Note: a later revision to the HAFA regulations increased this amount to $8,500 for Non-GSE HAFA short sales.)
The borrower asks the loan servicer to allow them to do a HAFA short sale. The new regulations say the servicer is supposed to approve or disapprove that request and send the Short Sale Agreement if approved within 30 calendar days. Don’t hold your breath! Compliance with this time limit is dismal. Similarly, if a borrower sends the servicer a sales contract and all the documents required by an Alternative Request for Approval of Short Sale (Alternative RASS), the servicer is supposed to evaluate that proposed contract and approve it, disapprove it or give a counter offer within 30 calendar days. Again, do not hold your breath when it gets close to the 30 days because you may turn extremely blue. The compliance with this time limit is improving, but do not promise your buyer that there will be an answer in 30 days because most of the time the buyer will be disappointed. However, these time limits should increase the number of HAFA short sales because more buyers will be willing to wait for the approval if it comes in a shorter time.
Realtors were not doing short sales because they are much more work, then at the end of the process the lenders would steal the Realtor’s commission. HAFA created regulations that the lenders could not touch the commission if it was six percent or less. So, the lenders hired consultants and contractors to do some of the work required by HAFA and charged the cost of that work to the Realtor’s commission. The new regulations prohibit this theft of the commission that the Realtor has earned.
If you want to read the complete regulations and the revision to the short sale manual that the lenders use, go to http://tinyurl.com/6lralo5 .
These amendment to the regulations allow more borrowers to qualify for HAFA, let more vacant properties be considered for HAFA, allow more flexibility in negotiating with junior lien holders, set time limits for the lenders to respond and eliminate a practice of charging the Realtor for contractors hired by the servicer. These changes not only increase the number of people and houses that qualify for HAFA, they encourage a a quicker response and fair compensation so that more real estate agents will be willing to work with a HAFA short sale. The additional flexibility in negotiating with junior lien holders should allow for more negotiations to be successful and increase the number of short sales that close. Things are moving in the right direction.