Do You HAFA? The HAFA Short Sale Program under Making Home Affordable _ 2
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LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848
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Table of Contents
Do You HAFA?
The HAFA Short Sale Program under Making Home Affordable __ 2
INTRODUCTION __________________________________________________________ 2
Overview: Making Home Affordable (“MHA”) _________________________________________ 2
HOME AFFORDABLE FORECLOSURE ALTERNATIVES PROGRAM (“HAFA”) _ 3
Background _____________________________________________________________________ 3
Foreclosure Alternatives: Short Sale and Deed-in-Lieu of Foreclosure _______________________ 3
Overview and Eligibility for HAFA __________________________________________________ 4
Qualifying factors for HAMP _____________________________________________________ 4
Qualifying factors for HAFA ______________________________________________________ 4
Benefits of a HAFA Short Sale or DIL ________________________________________________ 5
The SSA must include (among other things): _________________________________________ 5
Deed in Lieu ____________________________________________________________________ 6
The Three Faces of HAFA _________________________________________________________ 6
HAFA Caveats ___________________________________________________________________ 8
Beware of Unlicensed “Short Sale Negotiators” _______________________________________ 9
Mortgage Insurer Approval _______________________________________________________ 9
Tax Liability___________________________________________________________________ 9
Credit Reporting________________________________________________________________ 9
Junior Lienholders & Deficiencies__________________________________________________ 9
HAFA Resources ________________________________________________________________ 10
LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 1LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848 --------------------------------------------------------------------------------------------------------------------- Do You HAFA? The HAFA Short Sale Program under Making Home Affordable INTRODUCTION I am both an Attorney and Managing Broker (Realtor). Most of my law practice involves negotiating debt and advising borrowers on foreclosure, deed-in-lieu, bankruptcy, short sales and loan modifications. As a Realtor, I am predominantly a Listing Agent and most of my listings are short sales. I start with a thorough two-hour consultation. No one gets to see me as a Realtor until they first see me as a lawyer. This is very important because more often than not, a short sale is not the answer. Thus, no discussion about short sales would be complete without first discussing the alternatives, and with so many homeowners struggling right now, a good place to start is with some of the Federal help available under the government’s “Making Homes Affordable” Program which offers refinancing, loan modifications, short sales and deed-in-lieu options for homeowners. Overview: Making Home Affordable (“MHA”) The Making Home Affordable Program is part of the Obama Administration's broad, comprehensive strategy to get the economy and the housing market back on track. The Making Home Affordable Program offers strong options for homeowners: (1) refinancing mortgage loans through the Home Affordable Refinance Program (“HARP”), (2) modifying first and second mortgage loans through the Home Affordable Modification Program (“HAMP”) and the Second Lien Modification Program (“2MP”), (3) providing temporary assistance to unemployed homeowners through the Home Affordable Unemployment Program (“UP”), and (4) offering other alternatives to foreclosure through the Home Affordable Foreclosure Alternatives Program (“HAFA”). Making Home Affordable Borrower FAQs: http://www.makinghomeaffordable.gov/borrower-faqs.html LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 2
LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848 --------------------------------------------------------------------------------------------------------------------- HOME AFFORDABLE FORECLOSURE ALTERNATIVES PROGRAM (“HAFA”) Background On November 30, 2009, the Treasury Department introduced the HAFA program to provide a viable option for homeowners who are unable to keep their homes through the existing Home Affordable Modification Program (“HAMP”). HAFA and HAMP are both part of the government’s Making Home Affordable program and HAFA provides financial incentives to servicers and borrowers who utilize a short sale or a deed-in-lieu to avoid a foreclosure on an eligible loan under HAMP. The HAFA program took effect on April 5, 2010 for non-GSE mortgage lending (i.e., loans not sold to Fannie Mae and Freddie Mac or FHA/VA insured loans) and on August 1, 2010 for Fannie Mae and Freddie Mac. The HAFA program sunsets on December 31, 2012. On March 26, 2010, Supplemental Directive 09-09R replaced in its entirety Supplemental Directive 09-09 and increased the financial incentives: $3,000 for borrower relocation assistance; $1,500 for servicers to cover administrative and processing costs; and up to $2,000 match for investors for allowing a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis; up to 6% of the unpaid principal balance of each subordinate loan). With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower. Foreclosure Alternatives: Short Sale and Deed-in-Lieu of Foreclosure In a short sale, the servicer allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the mortgage. The short sale must be an arm’s length transaction with the net sale proceeds (after deductions for reasonable and customary selling costs) being applied to a discounted (“short”) mortgage payoff acceptable to the servicer. The servicer accepts the short payoff in full satisfaction of the total amount due on the first mortgage. In a deed-in-lieu of foreclosure (DIL), the borrower voluntarily transfers ownership of the mortgaged property to the servicer in full satisfaction of the total amount due on the first mortgage. The servicer’s willingness to approve and accept a DIL is contingent upon the borrower’s ability to provide marketable title, free and clear of mortgages, liens and encumbrances. Generally, servicers require the borrower to make a good faith effort to sell the property through a short sale before agreeing to accept the DIL. However, under circumstances acceptable to the investor, the servicer may accept a DIL without the borrower first attempting to sell the property. With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower. LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 3
LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848
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Before getting too excited, know that there is conditioning language throughout
Supplemental Directive 09-09R giving lenders wide latitude as to when and if relief will be
offered.
Overview and Eligibility for HAFA
First, look at HAMP. HAMP is intended to allow distressed borrowers to modify their loan and
retain home ownership.
Qualifying factors for HAMP
1. Borrowers principal residence,
2. Loan originated prior to 01/01/2009 (1st lien only),
3. Current loan balance less than $729,750,
4. Mortgage is delinquent or default is foreseeable, and
5. The borrower’s total monthly mortgage payments (including taxes and insurance) exceed
31% of the borrower’s gross income.
HAMP intended to provide borrowers the ability to modify existing loans. However, if that is
not possible or if the borrower fails to repay the modified loan, then the borrower may consider
selling short or surrendering the property through a deed in lieu of foreclosure, pursuant to
HAFA. Eligible borrowers must be evaluated for a HAMP mortgage modification before
moving to the HAFA alternative.
Qualifying factors for HAFA
Pursuant to the servicer’s policy, every potentially eligible borrower must be considered for
HAFA before the borrower’s loan is referred to foreclosure or the servicer allows a pending
foreclosure sale to be conducted. Servicers must consider possible HAMP eligible borrowers for
HAFA within 30 calendar days of the date the borrower:
1. Does not qualify for a Trial Period Plan;
2. Does not successfully complete a Trial Period Plan;
3. Is delinquent on a HAMP modification by missing at least two consecutive payments; or
4. Borrower requests a short sale or DIL.
Currently, a significant risk for any short sale seller is that seller’s lender may require seller to
remain liable for the deficiency. With either the HAFA short sale or DIL, the lender may not
require a cash contribution or promissory note from the borrower and must forfeit the ability to
pursue a deficiency judgment against the borrower. A HAFA alternative must be considered
before a lender can foreclose on a borrower.
LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 4LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848
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Benefits of a HAFA Short Sale or DIL
Allows the borrower to receive pre-approved short sale terms prior to the property listing.
Prohibits the servicer from requiring, as a condition of approving the short sale, a
reduction in the real estate commission agreed upon in the listing agreement (up to 6%).
Requires that borrowers be fully released from future liability for the debt.
Uses standard processes, documents and timeframes.
Provides financial incentives to borrowers, servicers and investors.
Currently, two significant logistical problems in any short sale transaction, is the length of time
required to gain lender approval and the inconsistency of documentation from one lender to
another. The HAFA short sale process employs standard form documents and defined
performance timeframes to facilitate clear communication between the parties to the listing and
sale transaction.
Servicers must adhere to the following guidelines in connection with the issuance of a Short Sale
Agreement (“SSA”):
Lender must determine minimum acceptable net proceeds;
Lender must determine allowable transaction costs;
Lender and borrower must execute a HAFA Short Sale Agreement.
The SSA must include (among other things):
1. A fixed termination date not less than 120 calendar days from the effective date of the
SSA;
2. A requirement that the property be listed with a licensed real estate professional doing
business in the community;
3. Either a list price approved by the servicer or the acceptable sale proceeds, expressed as
a net amount after subtracting allowable costs;
4. The amount of closing costs or other expenses the servicer will permit;
5. The amount of commission that may be paid, not to exceed 6%;
6. Notice that sale must represent an arm’s length transaction and that the purchaser may
not sell the property within 90 calendar days of closing;
7. An agreement that upon successful closing the borrower will receive relocation incentive
of $3,000, deducted from gross sale proceeds;
8. Notice that the lender will allow a portion of gross sale proceeds to be paid to
subordinate lien holders in exchange for release and full satisfaction of their liens;
9. Amount of partial mortgage payment that borrower may be required to pay during term
of SSA, which must not exceed 31% of borrower’s gross income;
10. Agreement that during SSA, lender will not foreclose.
Note that at any time, the SSA can be terminated for bad faith, borrower’s financial recovery,
and breach by borrower or listing agent, etc.
LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 5LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848
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When seller finds a buyer, seller must submit to the lender:
1. A copy of the executed sales contract and all addenda;
2. Buyer’s documentation of funds or pre-approval;
3. All information regarding status of subordinate liens and/or negotiations.
Lender has 10 days to approve and must approve sale with net proceeds at or above minimum.
Lender cannot require closing in less than 45 days. Up to $6,000 total, can be paid to junior
lienholders who discharge all remaining debt.
Deed in Lieu
If property does not sell, SSA may be extended or DIL may be considered.
In a deed-in-lieu of foreclosure (DIL), the borrower voluntarily transfers ownership of the
mortgaged property to the servicer in full satisfaction of the total amount due on the first
mortgage. The servicer’s willingness to approve and accept a DIL is contingent upon the
borrower’s ability to provide marketable title, free and clear of mortgages, liens and
encumbrances. Generally, servicers require the borrower to make a good faith effort to sell the
property through a short sale before agreeing to accept the DIL. However, under circumstances
acceptable to the investor, the servicer may accept a DIL without the borrower first attempting to
sell the property. With either the HAFA short sale or DIL, the servicer may not require a cash
contribution or promissory note from the borrower and must forfeit the ability to pursue a
deficiency judgment against the borrower.
The Three Faces of HAFA
1. Treasury Version (Non-GSE loans)
2. Fannie Mae Program
3. Freddie Mac Program
In June 2010, both Fannie Mae and Freddie Mac released guidelines for their HAFA programs to
begin no later than August 1, 2010. Below is an outline detailing some of the major differences
between the HAFA guidelines for GSE and non-GSE loans in the areas of eligibility, borrower’s
limits on cash reserves, incentives paid to servicers, borrowers and junior lienholders, maximum
allowable transactions costs & commissions, Private Mortgage Insurance (PMI), determination
of the subject property’s list price and rules surrounding the extension of the Short Sale
Agreement (“SSA”).
LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 6LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848
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Treasury Fannie Mae Freddie Mac
Eligibility Meet HAMP Meet HAMP Meet HAMP
threshold threshold threshold
requirements At imminent risk of More than 60 days
default delinquent
Cash Reserves Cash reserves not Borrowers who have Cash reserves must
specified, though the the ability to pay but be less than the
investor may have a choose not to greater of $5,000 or
limit (strategic default) 3x the current
are ineligible monthly payment
Cash reserves must
be less than the
greater of $5,000 or
3x the current
monthly payment
Incentives Borrower receives Same as Non-GSE Same as Non-GSE
$3,000 for moving loans, except loans, except
costs servicer incentive is servicer incentive is
Servicer receives $2,200 for a short $2,200 for a short
$1,500 for short sale sale sale
or DIL
administrative and
processing costs
Servicer pays up to
$6,000 for all junior
liens (6% of any one
lien) and Treasury
pays 1/3 up to
$2,000 as
reimbursement to
servicer
Maximum Reasonable and The servicer may Will pay the
Transactions customary as not require that the commission up to
Costs & specified in the commission be 6% of the final sales
Commissions SSA. reduced to less than prices.
No cap, though the 6% of the sales
investor could price.
require a max, listed
as either a
percentage or an
amount.
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Private PMI must approve Working to engage Working to engage
Mortgage and must release MI companies to get MI companies to get
Insurance borrower from blanket authority or blanket authority or
(PMI) deficiency claims delegated authority delegated authority
with some with some
conditions. conditions.
Determination List price is Servicer will work Servicer provides
of List Price determined based on with the real estate minimum list price.
minimum net broker & borrower Real estate broker
proceeds required, to list the property and borrower decide
as set by the for fair market actual list price
servicer. value, taking into necessary to obtain
consideration the final sale at
allowable minimum minimum price.
net proceeds.
Extension of Owner has 120 days The minimum Initial SSA term is
Short Sale from date of short- marketing period for 120 days from the
Agreement sale solicitation to a property subject to date the SSA is sent
(SSA) sell the house, at a HAFA SSA is 120 to the borrower.
which point a DIL days. Servicer may
action is initiated. Extension may be request Freddie Mac
Servicer may extend submitted to Fannie permission to extend
to a total of 12 Mae for approval. it no later than 15
months maximum. days prior to the
expiration of the
term.
Sales prices,
marketing strategy,
and choice of broker
will be reassessed if
the term is extended.
HAFA Caveats
Fannie Mae is the Program Administrator and the Treasury Department has selected Freddie
Mac as its Compliance Agent to provide regulatory oversight. So we’ve got Freddie auditing
Fannie!
LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 8LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848
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Beware of Unlicensed “Short Sale Negotiators”
Remember, DOL says that ALL short sale negotiators must have either a real estate license, a
mortgage broker’s license or a law license. Don’t refer or participate with any unlicensed short
sale negotiator. (Remember Jackowski!)
Mortgage Insurer Approval
For loans that have mortgage insurance coverage, the servicer/investor must obtain mortgage
insurer approval for HAFA foreclosure alternatives. A mortgage loan does not qualify for HAFA
unless the mortgage insurer waives any right to collect additional sums (cash contribution or a
promissory note) from the borrower.
Tax Liability
Even if HAFA eliminates obligation to repay deficiencies to lender(s) in a short sale, remember
that tax liability may still exist. Under the Mortgage Debt Relief Act of 2007, if forgiven debt is
from an equity refinance used for anything other than improvement of foreclosed property,
forgiven debt is taxed as income. (See IRS Publication 4681 for additional information).
Credit Reporting
The servicer will report to the credit reporting agencies that the mortgage was “settled for less
than full payment” which may hurt credit scores.
Junior Lienholders & Deficiencies
This is a HUGE caveat!
To receive an incentive, subordinate lien holders must agree to release their liens and waive all
future claims against the borrower. The servicer is not responsible for any future actions or
claims against the borrower by such subordinate lien holders or creditors.
According to Supplemental Directive 09-09R, Release of Subordinate Liens:
The servicer, on behalf of the investor, will authorize the settlement agent to allow a
portion of the gross sale proceeds as payment(s) to subordinate mortgage/lien
holder(s) in exchange for a lien release and full release of borrower liability. Each
lien holder, in order of priority, may be paid no more than six percent (6%) of the
unpaid principal balance of their loan, until the $6,000 aggregate cap is reached.
Regarding the release of subordinate liens, how do you reconcile the above language from the
Supplemental Directive with the language below in the Short Sale Agreement (SSA) that
borrowers must sign?
LYNN ARENDS | ATTORNEY & MANAGING BROKER Page 9LYNN ARENDS | LAW GROUP PLLC & REALTY GROUP | 1525 FOURTH AVE. STE 300 | SEATTLE, WA 98101 | 206.282.4848
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For the HAFA Short Sale:
If there are such liens, you will need to either pay these loans off in full or
negotiate with the lien holders to release them before the closing date. Under this
program, you must make sure other lien holders will agree not to pursue other
legal action related to the pay off of their lien, such as a deficiency judgment.
You can get help from your broker to negotiate with the other lien holders.
For a Deed-in-Lieu under HAFA:
We require each subordinate lien holder to release you from personal liability for
the loans in order for the sale to qualify for this program, but we do not take any
responsibility for ensuring that the lien holders do not seek to enforce personal
liability against you. Therefore, we recommend that you take steps to satisfy
yourself that the subordinate lien holders release you from personal liability.
HAFA Resources
Official Home Affordable Foreclosure Alternative website (administered by Fannie Mae)
https://www.hmpadmin.com/portal/programs/foreclosure_alternatives.html
Making Home Affordable web site for consumers:
http://www.makinghomeaffordable.gov/
The complete list of lenders who participate in both HAMP & HAFA programs is
available at: http://www.makinghomeaffordable.com/contact_servicer.html.
HAFA Supplemental Directive 09-09 Revised:
https://www.hmpadmin.com/portal/docs/hafa/sd0909r.pdf
HAMP Web site for loan servicers:
https://www.hmpadmin.com/portal/index.html
Fannie Mae: https://www.efanniemae.com/sf/servicing/hafa/index.jsp
Freddie Mac: http://www.freddiemac.com/singlefamily/service/hafa.html
National Association of Realtors®
http://www.realtor.org/government_affairs/short_sales_hafa
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