Power Shift for HAFA with Short Sales Changes February 1, 2013
On November 1, 2012, the Treasury issued Supplemental Directive 12-07 that dramatically changes the way short sales are done for non-GSE loans i.e. all the loans other than Fannie Mae, Freddie Mac, FHA, VA and Rural Housing Service. Fortunately for property owners in distress, the directive extends the life of Home Affordable Foreclosure Alternatives (HAFA) so that you can make a request to do a HAFA short sale up to December 31, 2013 and be covered by the program, so long as your sale closes before September 30, 2014. While the regulations refer to the property owner as a borrower, because they are written for lenders, this article refers to them as sellers, because this is written for people interested in real estate sales.
Initiation Changes from Bi-lateral to Unilateral
The biggest change made by this Directive is to expedite the process of initiating the Short Sale. The old Short Sale Agreement (SSA) was a two party agreement betewen the lender and the seller to a unilateral notice called a Short Sale Notice (SSN). The old version of HAFA started with the sellers requesting the lender to qualify them for HAFA, then waiting patiently until the lender responded. If the lender approved the HAFA Short Sale, the proposed Short Sale Agreement (SSA) was sent to the seller. This SSA had to be signed by the seller and returned to the lender in order to complete the HAFA approval. The process also had a trap that if the sellers did not respond within 14 days to the proposed SSA, they could be denied the benefits of HAFA.
The new procedure eliminates the delay of waiting for a response when the seller wants to be pre-approved for a HAFA Short Sale. It looks like a change in forms, but it is much more than that. The Short Sale Notice (SSN), replaces the Short Sale Agreement (SSA) and you would think that is no big deal to have a different form. The HAFA Short Sale is initiated when that SSN notice is sent, not after deliberation by the lender and a response by the Seller. The lawyers would say this is not a bilateral agreement that is created when the lender consents. It is a unilateral notice. This changes everything and eliminates the possibility that the HAFA Short Sale will be terminated if the seller does not get the paperwork back to the lender in time.
Out with Old Documents, In with New Documents
The directive starts by saying that some old documents like the Short Sale Agreement (SSA), Request for Approval of a Short Sale (RASS) and the Alternative RASS not going to be used any more. Then it says that many other documents are not mandatory, as the lenders can develop their own version so long as they are consistent with the HAFA regulations. This flexibility may be necessary because the lenders will have to dramatically speed up the review process, so allowing them to create their own versions of the forms should facilitate that.
The Request for Approval of Short Sale (RASS) is no more and there is no longer an Alternative Request for Approval of a Short Sale (Alt RASS). They are replaced by the Acknowledgement of Request for Short Sale (ARSS). I have to smile when I pronounce that acronym. This document is used if you have entered into a sales contract before sending the lender a Short Sale Notice (SSN) or other initiation of a HAFA short sale.
Hardship Documented or Pre-Determined Affects the Timeline
There are major distinctions in the HAFA process found in the new regulation depending on whether a Hardship Affidavit has been submitted to the lender. The regulations us the term Hardship Affidavit to include either the Treasury Hardship Affidavit (that includes Dodd-Frank affidavit) or a Request for Mortgage Assistance (RMA). Either set of documents will be considered a Hardship Affidavit and trigger different results if they have been submitted.
Pre-determined Hardship is a brand new concept found in the regulations. If the borrower is 90 days or more behind on the mortgage payments and has a credit score of 620 or less, the hardship has been pre-determined. In other words, meet those two criteria and you qualify as having a hardship in the eyes of HAFA. HAFA Affidavits, discussed later, will have to be filed with the lender on or before closing, but the borrower is already determined to have a hardship.
Here is where the filing of a Hardship Affidavit with the lender makes a difference. If a seller has filed a Hardship Affidavit with the lender and request pre-approval for HAFA, the lender must respond within 30 days. The response can be (1) a HAFA approval (specifying the terms of the approval), or (2) denial of HAFA but approval for a proprietary short sale (a HAFA-like short sale that many major lenders have developed) or (3) a denial of all forms of short sales. The advantage of a Pre-determined Hardship can be seen in the next part of the regulations. The same rules and time limits apply for a seller who qualifies for Pre-determined Hardship i.e. you get this faster response without filing the Hardship Affidavits.
If no Hardship Affidavit has been filed with the lender and if the borrower does not qualify for Pre-determined Hardship, the procedure is different. The seller requests pre-approval under HAFA and the lender must acknowledge this request in 10 business days. Part of that acknowledgement is to send the lender?s version of the hardship forms to the seller and specify the terms the lender will use to make a decision on HAFA. The acknowledgement also includes a timeline showing that the lender has to make a determination on the HAFA review within 30 days of receipt of the Hardship Affidavit.
Essential Terms of HAFA Pre-Approval
When you get pre-approved for a HAFA short sale, the lender must give you the terms of the pre-approval in writing. The Short Sale Notice (SSN) should fulfill that requirement. However, lenders are not required to use the SSN. So, if they use a proprietary short sale notice or other form of pre-approval, it must include the essential ingredients of a HAFA short sale. The new amendments say they must include the following HAFA short sale terms:
1. A description of what the sellers must submit when they get a sales contract (referred to as Offer Documents). The regulations give examples such as (1) a copy of theexecuted sales contract and all addenda, (2) the buyer?s proof of funds or pre-approval letter on letterhead from a lender and (3) information regarding the status of junior liens and/or negotiations with junior lien holders;
2. A requirement that the seller and the buyer(s) must execute a HAFAAffidavit prior to the closing. The short sale cannot close without this HAFA Affidavit;
3. The new re-sale limitations that prohibit a re-sale within 30 days and limit the sales price for 31 to 90 days after closing;
4. A requirement that the borrower must execute a Hardship Affidavit as a condition of closing;
5. If the seller has a real estate license, he or she cannot earn a Commission by selling his or her own property and may not have any agreement to receive all or a portion of the commission after closing. In other words, if the seller is a real estate agent, he or she cannot get a referral fee after the closing;
6. While the seller is in compliance with the terms of the preapproved HAFA short sale, the lender will not complete a foreclosure sale. However, the lender may initiate or continue the foreclosure process, but cannot complete the sale;
7. A requirement that borrowers are responsible for conveying marketable title;
8. The borrower is responsible for property maintenance and repair until closing;
9. Upon successful closing, the lender will record a lien release in full satisfaction of the debt. In other words, the lender will waive the right to collect any deficiency (the amount that the payment is ?short?).
10. If the seller intends to request relocation assistance for any non-borrower occupant (usually a tenant) the seller will need to provide evidence of occupancy and a Borrower Occupant Certification as well as a Dodd-Frank Certification, regardless of whether the seller or someone else is receiving the HAFA relocation assistance;
An optional term may say that any sale approved by the lender may provide an option for the property to be sold to a non-profit organization with the stated purpose that the property will be rented or sold to the borrower;
The most wonderful part of the amendments to HAFA involve speeding up the process. This will help prevent buyers from walking away when the decision making process takes too long. The time limits depend on whether or not you have a pre-approval..
During the Pre-Approval process, the lender will establish the amount of money that will be acceptable to approve the short sale, called the Minimum Net. With a Pre-Approval for your HAFA Short Sale, the review process for an offer starts when the offer is submitted. If the net proceeds equal or exceed the Minimum Net and the offer meets all other terms of the Short Sale Notice (SSN), the lender MUST APPROVE it in 10 business days of receipt of the Offer Documents. Think about that. If you have an offer that provides the amount of money specified in the HAFA Short Sale Pre-Approval, you know the offer will be approved, and it is supposed to only take 10 business days to get that approval.
With a Pre-Approval, if net proceeds of the offer to purchase are lower than the specified Minimum Net, the lender must respond within 10 business days of receipt of the Offer Documents with an approval, disapproval or intent to make a counter offer. So, even if you do not get the amount of money required by the Short Sale approval, you will get an answer in 10 business days. You might even get an approval in those 10 business days.
Without a Pre-approval, the seller submits an offer to purchase. The lender sends an Acknowledgement of Request for Short Sale (ARSS) (or something equivalent) within 10 business days. If no Hardship Affidavit has been submitted prior to this, the Acknowledgement of Request for Short Sale (ARSS) includes sending the required Hardship Affidavit to the seller. In other words, the lender sends a response that acknowledges the sellers? request for approval. The next step depends on whether a hardship has been established. If a Hardship Affidavit has been submitted or if the seller meets the requirements for a Pre-determined Hardship ,, the lender must approve, disapprove or counter the offer within 30 calendar days. If no hardship affidavit has been submitted and the seller does not meet the Pre-determined Hardship standards, the lender must approve, disapprove or counter the offer within 30 calendar days of when the Hardship Affidavit is submitted. So, it is important to either submit the Hardship Affidavit or establish that the seller meets the requirements of a Pre-determined Hardship. Otherwise the lender just acknowledges the seller?s request and the time limit does not start running until the Hardship Affidavit is submitted.
Affidavits Required for Closing
A HAFA Short Sale cannot close without a HAFA Affidavit. In the HAFA Affidavit, everyone involved in the sale states that this is an the arm?s?length sale, verifies the information about the occupancy of the property and affirms the accuracy of the HUD-1 Settlement Statement. Also, the affidavit acknowledges the limitations on future resale of the property.
The seller must show evidence satisfactory to the servicer that the borrower, tenant or other non-borrower occupant lived in the property as a principal residence. The time of residence is important. The residence must be occupied on (1) date the borrower requested a HAFA short sale or (2) the date the borrower asked for the approval of an offer to purchase if there was not a prior request for the pre-approval of a HAFA short sale.
Time Limits on Resale
The current regulations prohibit resale
of a property for 90 days. The Directive shortens that time limit to 30 days. Then, the Directive puts a restriction on sales that occur between 31 and 90 days after closing. The property can be sold for a sales price that is up to 120% of purchase price. After 90 days, there is no restriction on the sale of a property purchased as a HAFA Short Sale.
More Money for the First Lender Who Allows Payment to Junior Liens
The amount of money allowed to be paid to all junior liens is not changed by this directive. It remains at $8,500. Junior liens are second, third and subsequent loans, as well as judgments and other liens. The mortgage that is in first position wants as much money as possible. When this first lien holder allows junior liens to be paid up to $8,500, the old regulations allowed the first lien to be reimbursed 1 dollar for every 3 dollars allowed up to a total of $2,000. The Directive doubles the ratio and increases the limit. New rule reimburses the first lien hold 2 dollars for every 3 dollars paid to the junior lien holders up to a total of $5,000. Money talks when you are negotiating with the first lien holder. Since they get more money when they allow payments to the junior lien holders, it makes it easier for the first lien holder to approve the Short Sale.
In Summary, the new directive changes the power to initiate a short sale by allowing the borrower to just send a notice to the lender. The way of establishing a hardship is changed and there is even a Pre-Determined Hardship. Some of the required form change. Some of the requirements for relocation assistance and for reimbursing the first lien holder change. The most welcome change in my eyes is the shortening of the process that require the lender to respond in time limits ranging from 10 business days to 30 calendar days. Hopefully, this will result in more buyers ?staying the course? and completing the purchase of a Short Sale. Maybe the horror stories of Short Sales that take forever are a thing of the past.