HAFA Short Sales Explained
On November 30, 2009, the U.S. Treasury issued new guidelines under the Making Home Affordable program to
create the Home Affordable Foreclosure Alternatives Program (HAFA). Those guideliens were modified March 26, 2010 and the HAFA program went into effect April 5, 2010. If HAFA is implemented widely, the Short Sale
process could completely change. The new program will reverse the Short Sale procedure
from the Realtor?s perspective.
Now, the Realtor and the seller take all the risk associated with Short Sales. They hope
the seller will qualify for a Short Sale and they hope they will get a sales price high enough to be acceptable to the lender. They will not find out until they receive an offer, sign the sales contract, submit it to the lender and get it reviewed by a loss mitigation negotiator. If the seller does not qualify or the sales price is not high enough, the Short Sale will not be approved, and all the time, money and effort are wasted.
With the new program, the seller?s financial qualification for a Short Sale is determined at the beginning of the
process. Also, the lender gets an idea of the market value of the home with an appraisal or Broker?s Price Opinion (BPO). The lender cannot charge the borrower/seller for this evaluation. Then, the lender lets the listing agent and the seller know what they will accept to pay off the loan, i.e. the net proceeds that the lender needs. The lender can express this amount as a specific amount in dollars, a percentage of the market value or as a percentage of the lender?s suggested list price. So, you will know how much you need from the sale of the property for the Short Sale to succeed.
The lender will also review the title to the property. While they are not obligated to do a title search, the lender will use their resources to find all the liens on the property. There are Short Sale listing agents who do not follow my procedure of doing a title search when I list a property, and they get surprised with other debts just before closing. Under HAFA, there should be fewer surprises.
In short, the essential features of the Short Sale are reviewed and approved at the time the listing is taken and all
of this goes into a Short Sale Agreement (SSA). The primary decision to be made after an offer is submitted to the lender is whether the proposed contract gives the lender the money they said they would take as full settlement.
The process creates standardized documents, so all the lenders will use the same forms. My staff will love this, because
every lender currently wants to use their own forms.
Some of the main forms are a Short Sale Agreement (SSA) used in conjunction with listing the property for sale and the Request for Approval of a Short Sale (RASS) used when an offer is submitted. The minimum amount of time allowed to sell a property under the HAFA Short Sale is 120 days, so listing agents have at least 120 days to get an offer. By the way, the lender cannot increase the amount they want to receive from the sale during this period. The Short Sale period may be extended by the lender for up to 12 months, so you have to get an offer within a year at most.
During the time that the Short Sale Agreement is in effect, the lender can start a foreclosure proceeding
and move it along toward a sale date, but the lender cannot complete a foreclosure. So, all those calls I have to
make to lenders reminding them to postpone the foreclosure sale while they are considering a Short Sale should not be necessary under these regulations.
The guidelines specify that the lender needs to respond to a proposed contract within 10 business days. Many Short
Sale Realtors look in wonder at that short time frame, as they are used to waiting for months. How is that possible? The
primary review to be made after the contract is submitted is whether the amount the bank receives is higher or lower than what they have agreed to accept. Under the current Short Sale review procedure, the loss mitigation negotiator goes through about 70 to 100 pages of Short Sale package, much of which is complicated financial information. Under the new program, the negotiator will look at the HUD-1 for the net proceeds and compare that number to their pre-approved number.
By the way, the servicer must consider the seller/borrower for a Short Sale under HAFA within 30 days of the seller failing to qualify for a loan modification, failing to comply with a loan modification or requesting that the servicer consider the seller for a Short Sale. So, the time limit for responding to the seller?s request to qualify the seller for a
Short Sale is only 30 days, considerably shorter than many lenders? time to review a Short Sale application.
Currently, there is a large battle over whether the lender will give the seller/borrower a full release from the entire obligation under the note. When the property was purchased, the borrower signed a note (promise to pay) and
a deed of trust (allows the property to be security for the loan). A Short Sale can close if the lender releases just the
deed of trust that secures the property. However, good real estate agents also want the seller to be fully released from
the entire obligation under the note, so the seller/borrower will not be hounded by collection efforts after the sale. Under the HAFA program, the lenders have to give the seller/borrower a full release from the obligation of the note, and the lenders cannot require the seller to sign a note to make additional payments after the sale closes. This requirement also applies to any mortgage insurer of the loan, so the seller walks away without any further obligation on this debt.
Another battle that rages with current Short Sales revolves around ?Commissionectomy,? where the lender tries to
cut the real estate agent?s commission in a short sighted effort to make more money on this one sale (and lose much more money when the agents will not do Short Sales with them again). Under the new program, the amount of the commission is agreed as a part of the Short Sale Agreement. The guidelines prohibit the lender from attempting to cut the commission after that. I enjoy the irony that the regulations say the maximum commission is 6 percent, so the government can fix a uniform commission for real estate agents even though the same government?s Justice Department engaged in extensive litigation against the real estate industry claiming that commissions where price fixing has occurred hurt the consumer.
The biggest battleground with current Short Sales occurs when there is more than one lien on the property. The
property can have multiple mortgages and other secured debts like judgment liens. The lender that is in first position
wants as much money as possible, and does not want the other lenders to get hardly any. The junior lenders want
as much as they can, typically at least 10 percent of the outstanding balance of the debt. The November guidelines provided that the junior lien holders will get an aggregate of $3,000 (with a maximum of 3 percent of the principal balance for any one lien). That provision was modified March 26, 2010 to double these numbers so that the junior lien holders can get 6% of their outstanding balance, up to a total of $6,000 for all the junior liens. In other words, if you have a second, third and fourth lien, the total paid to all three was going to be up to $3,000, now it is up to $6,000. I do not see this provision establishing peace between the lien holders. The junior lien holders may still want to get more money, as $6,000 may not be enough to settle a $100,000 second loan. In other words, the Realtors are still going to have to use the negotiating tools they have learned to get this battle settled. However, citing the HAFA regulations as a higher authority to convince a junior lien holder that $6,000 is reasonable will give real estate agents another tool in their tool box. If you want to learn negotiating tools for Short Sales, go to www.ShortSaleNegotiatingSpecialist.com .
There are financial benefits to the seller and the lender under the HAFA program. If the lender completes the Short
Sale, the loan servicer was going to receive $1,000 from the Treasury under the November guidelines. That amount has been increased by the March revison to $1,500. This helps a great deal with the servicer’s cost of processing the short sale, and may allow the servicer to outsource the short sale to a firm like Stewart Lender Services with the $1,500 covering most, or all, of the cost. If the first lien holder allows the second lien holder to receive $6,000, the Treasury will pay the investor who owns the note up to an additional $2,000, so this will help with the battle between the first and second lien holders. More specifically, the first lien holder gets one third of the amount allowed to the junior liens, up to a maximum of $2,000 under the terms of the March revision. The November guidelines originally allowed for only $1,000 using the same formula of one third of the amount paid to the junior lien holders.
Take a moment to consider what this means to lenders with a large portfolio of loans that need modification or Short Sales. For example, Bank of America acquired the Countrywide portfolio that has an abundance of this type of loan. Some of the loss mitigation negotiators tell me that they receive between 500 and 1,000 Short Sale applications per day. If only half of those applications were approved, that is $375,000 to $750,000 per day. In other words, we are
talking about someplace in the range of $19,500,000 per year for a five day work week. With that kind of income stream, Bank of America may be happy they bought Countrywide. How many loss mitigation negotiators could you hire if you were going to make that kind of money? Also, that money is not coming from a buyer who might change their mind or be unable to pay. It is coming from the Treasury who never runs out of funds. This provision of HAFA may be the most important, as it will allow lenders to staff up to handle the volume of Short Sales and decrease the time for a response.
Other financial incentives allow the seller to receive $3,000 from the sale as a moving allowance under the March revisions. The November guidelines only allowed $1,500. This will help the seller move to a new location after the sale closes, which helps with the problem that real estate agents have in getting people who have no money to move. These funds might also be available to help negotiate a settlement with junior lien holders, or pay items like homeowners association dues and property taxes that become sticking points in Short Sale negotiations.
By the way, the Short Sale Agreement will specify which closing costs and expenses the lender will allow, so the
listing agent will know whether there will be problems getting certain expenses paid, like back homeowners dues.
The draft HAFA regulations that I reviewed had a number of provisions requiring the seller/borrower to be delinquent in their payments, using language that specified that the borrower is in default on the obligations of the note. I sent many emails objecting to this requirement. American society is built on the idea that those who fulfill their obligations should be rewarded. This requirement punished people who worked hard to be sure they made their mortgage payments, even when they were in financial trouble. In some situations, there is a reason for requiring that
the seller/borrower be in default. For example, some of the agreements for Mortgage Backed Security (MBS) pools will
not allow a loan to be removed from that pool to start a Short Sale negotiation unless the borrower is delinquent in the
payments. Where this is a requirement, the borrower/seller will have to be made aware that they may have to hurt their credit even more by missing payments in order to qualify for a Short Sale.
For example, I was doing a Short Sale on a condominium in Raleigh, North Carolina where the investor was Fannie
Mae. Cartus, the servicer, would not proceed with the Short Sale until the borrower missed two payments, and then they would process the Short Sale. In other words, there would be many missed payments before the sale closed. I contacted Fannie Mae and the supervisors explained the MBS rule to me and said there were certain exceptions to these rules. My seller/borrower was recently married, just had a new baby, had other financial changes going on in his life where he did not want to harm his credit. With the cooperation of Cartus we were able to miss only one payment while they reviewed the Short Sale in advance of the missed payment. As soon as the payment was missed, the Short Sale was approved and the cash buyer closed the sale a few days later. In other words, it looked like the borrower had not made a payment in anticipation of the closing, something that frequently occurs when a payoff has been ordered by the escrow or closing attorney and making a payment confuses the payoff statement from the lender. Cartus took my suggestion and went out of their way to find a solution that complied with the MBS requirements and caused the least damage to the seller/borrower.
In general, the new HAFA regulations do not have a blanket requirement that the borrower/seller be in default.
The regulations state that the borrower is delinquent or default is reasonably foreseeable. There are some minor vestiges of that idea that were not taken out, such as a phrase that says the lender may terminate the Short Sale review if the borrower brings the loan payments current. I object to the idea that a borrower could lose the Short Sale by working hard and making the payments. However, the provision is at the discretion of the lender, and I doubt that any lender would stop a Short Sale in process with a financially troubled homeowner just because they made the payments.
Real estate agents will love some of the provisions of these regulations. The property has to be listed with a licensed
agent who regularly sells in the area where the property is located. I believe this leaves out Redfin and similar firms that do not have a presence in the local area. The seller has to keep the property in marketable condition, so I will not
have to be turning on the utilities at some of my Short Sales in my name. The seller has to cooperate in the marketing
effort and respond to requests by the agent and the lender, so no more uncooperative sellers. Also, the Short Sale Agreement must give the buyer at least 45 days to close the sale, so real estate agents will not get an approval after months of waiting that says the buyer has to close in less time than anyone can get financing.
I enjoyed reading the part of the regulations that says the servicers must have adequate staff to comply with the
time limits of HAFA. Telling a borrower that they have the right to a Short Sale within 14 days of a determination on the loan modification, responding to a proposal to do a Short Sale with a Short Sale Agreement in 30 days and reacting to an offer within 10 business days will require major staffing increases by some lenders. The lenders are required to report how they are complying with HAFA to Fannie Mae. Also, Freddie Mac audits the lenders to enforce its provisions.
Just like in any Short Sale, the transaction must be a good faith, arms-length sale. The seller cannot buy back the house after the sale, so those plans to sell to a cousin and buy it back will not work. In most situations, the seller will not be allowed to rent the home from the new buyer, unless that is allowed by the investor?s guidelines. One additional requirement is that the buyer may not sell the property for 90 days. This will cut off a number of ?internet gurus? who tell people they can make fortunes flipping Short Sales. Similarly, the seller cannot receive any of the sale proceeds (other than the $3,000 relocation assistance) and cannot receive any of the commission. So, real estate agents who have been getting Short Sale listings by giving some of their commission to the seller will have problems.
The regulations specify that reporting a Short Sale to the credit bureaus requires a special comment, and the regulations give an example of reporting the Short Sale as ?account paid in full for less than the full balance?. There will be trouble for agents who try to get Short Sale listings by promising that there will be no reporting to the credit bureaus, or that they can avoid any adverse effect on the seller?s credit.
Are these new regulations the Godsend for Short Sale real estate agents? No, there are a large number of Short
Sales that are not covered by HAFA. First, they do not apply to loans owned or guaranteed by Fannie Mae or Freddie
Mac, which is a huge exception to the rules. However, at the National Association of Realtors convention in 2009, Fannie Mae executives announced a pilot program to study new Short Sale procedures that had some provisions that are similar to HAFA.
The November draft of the regulations said HAFA Short Sales were allowed only on loans that have gone through the Home Affordable Modification Program (HAMP). That provison was changed in the March revision, as any borrower can request a HAFA short sale. However, the borrower must meet qualifications that are similar to the HAMP program. In other words, the loan must be on the borrower?s principal residence, so it does not apply to investment
properties. The regulations also limit HAFA to loans where the outstanding principal balance is $729,750 or less (so that leaves out most luxury properties and many of the loans in states like California). With the November verions of the regulations, the homeowner must have tried to do a loan modification under the HAMP regulations. So, if
someone just lost their job so that they do not have a prayer of qualifying for a modification, do they have to go through that procedure? Not under the March revision to the guidelines.
It does make some sense to couple the HAFA Short Sale with a HAMP modification, because the seller will have furnished the lender with the same financial information. However, some real estate agents may find the difference between modification and Short Sales interesting. When the borrowers are applying for a loan modification, they are trying to show financial strength to convince the lender that they can make the payments if they are modified. When the borrowers are applying for a Short Sale, they are trying to show financial weakness to convince the lender that they cannot make the payments and foreclosure is the other alternative.
The Short Sale Agreement may specify that the borrower/seller must make mortgage payments during the Short Sale period, but those payments cannot exceed 31 percent of the borrower?s gross monthly income. However, it is not mandatory that the agreement have a payment provision, and the forbearance of loan payments is specifically
These regulations went into effect April 5, 2010, so lenders who participate in HAMP will have to have their procedures in place and their staff trained by then. If you want an extensive analysis of the HAFA program, I did a 90 minute webinar for the Council of Residential Specialists (CRS) of the National Association of Realtors that you can view by going to http://www.crs.com/Education/287?cid=W027R . Actually, it was supposed to be 60 mintues to start, CRS said I had so much good information that they stretched it to 90 minutes, and it actually ran close to two hours because the 480 people who signed up for it participated so much at the end of the session that CRS kept it going.
These regulations for the Home Affordable Foreclosure Alternatives program are a huge step in the right direction because they change the process to be more rational. Most of the Short Sale decisions are made at the time the sales process starts. Then, the review is expedited so buyers do not have to wait for months to hear whether they bought a home. Then, there are financial incentives that compensate the servicer, the loan investor and the seller to make the process more financially viable. Finally, there will be no more ?Commissionectomy? so Realtors will not be financially prevented from doing Short Sales.
I hope these ideas spread like wildfire.