The “new laws” under the HAFA programs, or Home Affordable Foreclosure Alternative, implemented by the Obama administration is one of things that many people have been asking me about.

First and foremost, it’s not a new law. HAFA is a proposed program that lenders can opt into, that is, if they choose to. It doesn’t mandate the lenders or obligate them to comply with anything that is not in their best interest, unless they want to.

In this article, I’ll elaborate on the some of the program terms and conditions. I’ll also state here my opinion on them as a short sale specialist. However, it’s only an opinion and should not be taken as a legal advice.

But as an expert in Short Sales, with years of experience and extensively well-versed on the various intricacies of Short Sales negotiations, I am pretty much familiar with what lenders want and what they consider as acceptable terms for a Short Sale.

When it comes to a HAFA Short Sale, there are 2 ways to go. First, you can request to utilize the program through a Short Sale Agreement (SSA) before your agent has any type of Short Sale offer. Second, when your agent has an offer, he can just appeal for an Alternative Request for Short Sale (ARSS).

What’s the difference? With the SAA, the lender will determine the price before the agent will do the price listing. With the ARSS, on the other hand, the lender will just have to evaluate the offer submitted by your agent.

So what’s my opinion on the SAA method?

If you let the lender do the determination on the Fair Market Value of your property, it could open up a can of worms. The lender will, of course, base his decision on a “Drive by BPO” value other than the interior value. Just in case you don’t know this, here’s how it works: when a loan goes into default, the lender will normally order an exterior evaluation of your property, or known as Broker’s Price Opinion.

So the lender will hire an agent to take exterior pictures of your home, as well as taking a quick look of the outside of your property. There’s the rub. The agent is only limited to have an exterior evaluation and can only go as far as peeking at your window to check the inside of your house. He won’t naturally be able to know the real condition of your property inside and out.

This leads us to conclude that BPO is not a reliable way of estimating the true market value of your property. I’ve seen many Short Sales falling through due mainly to unrealistic values, which also lead to serious consequences (that will be discussed later).

The next important point is about the seller’s responsibilities. (Note: This information is right out of the HAFA document which I take the liberty to comment on each one.)

Short Sale Program – Your Responsibilities

You have until [insert date here which should be 120 calendar days from the date of this letter] to sell your house. This Agreement terminates after that date, unless extended by us. Here are your specific responsibilities during this time, you must:

• Keep your property in good condition. Repair and cooperate with your broker when
  showing your house to a potential buyer.
• Pay partial mortgage payments of $_________ by the 1st day of each month starting
  from __________ 1, 20___ until your property is sold and the title is transferred.
  While selling your house, you still legally owe the amount of your current monthly
  mortgage payment. But, as part of the Agreement, we will accept a reduced payment till the
  house is sold or this Agreement expires. These payments do not constitute any alteration of your mortgage. This is only optional. The lender can either ask for payments or not. If he does, the payments will be equivalent to 31% of the homeowner’s gross income. When you are profitably employed and can make the payments, it would be best. Yet, if this is not the case, you just lost your job, or there’s a death in your family or divorce and other very unfortunate things, and you cannot make those payments, the Short Sale will be denied and serious issues will commence (see below as to why).
• Provide the buyer of your property with a clear title. Also determine if you have other loans or liens such as a home-equity credit or a second mortgage. You can either pay those liens in full or negotiate with the lien holder to free you from them prior to the closing date. Make sure that other lien holders will be in agreement with you not to pursue any legal action related to the pay off such as a deficiency judgment. Get help from your agent to negotiate with other lien holders.
• Remember that clearing your liens and delivering a clear and marketable title is your primary responsibility. We may allow you 6% or more of the unpaid principal balance (but should not exceed $6,000 for all the loans in total) that should be paid from the sale proceeds. If you have these types of liens on your home, kindly gather any paperwork you have and submit them to us when you return the signed Agreement.
• Expect to either pay the Junior Liens in full, or negotiate a settlement. The maximum allowed is 6% or up to a maximum of $6,000. Let’s break it down. The most you will pay is $6K. But what if there is a 2nd mortgage option of $150K? Do you think the 2nd mortgage lender will agree to take $6K and give up his right to pursue you for the difference? I doubt it! And what if it’s a judgment? Those lenders will NEVER issue a full satisfaction. They may agree to release the lien, but that is just about it! Do any Junior Lien holders will play nice? Well, Maybe.
• Need to complete some paperwork at some point in the short sale process, like when an offer is received. You’re responsible to return necessary documents within the time allowed in the Agreement.

Short Sale Program – Additional Information

• Keep in mind that you cannot list the property or sell it to a buyer who is related to or you have a close personal or even business relationship with. Legally, it has to be an “arm’s length transaction”. If you posses a real estate license, you cannot earn a commission by listing your own property, or have any agreement to receive a percentage of the commission after closing.
• The buyer of your property should follow the agreement not to sell the house within 90 days
  after he/she bought it from you. You can’t also expect to rent or buy your house back after the sale is closed. Any violation of the arm’s length transaction agreement may be a considered a
  breach of the federal law.
  • I agree with most of those mentioned above, except about the 90-day policy. This is America. The land of opportunity. It is the right of a buyer what he wants to do the property he paid for with his money (with a good reason, of course).What about the seasoned investors who can turn the property in two weeks? If you
    have seen the show Extreme Makeover, you saw those guys who do a complete rehab
    of those properties in days! This makes us wonder why we have to wait for 90 days to
    sell a property. Even FHA, a government agency, no longer follows the 90-day seasoning
    requirement.
• We will need to negotiate with your broker, and talk with others involved in the sale. When you signed an Agreement with us, you are giving us the authority to communicate and share
  necessary financial information about your mortgage, subordinate liens, credit history, and
  plans for relocation. This would also involve your broker and other third parties associated
  with the transaction including the United States Treasury employees and its financial agents.

Do we really want the IRS to know everything?

• It is important to report the sale as debit forgiveness to the Internal Revenue Service (IRS) on Form 1099C. Debt forgiveness, in some cases, could be taxed as income. The money we pay
  you for moving expenses can also be considered as income. We recommend that you contact
  the IRS to know if you have any tax liability. Also talk to your accountant about the “Mortgage
  Debt Forgiveness Act of 2007″ and see if you can claim insolvency.
• We will follow standard industry procedure and report to the major credit agencies that your mortgage was settled, although for less than the full payment. However, we have no control
  over the impact of the said report on your credit score. If you want to learn more about this
  matter, you can click this following link http://www.ftc.gov/bcp/edu/pubs/consumer/credit/
  cre24.shtm.
• When you have complied all your responsibilities but unable to sell your property, we’ll allow
  you the ownership of your house and all property secured by your mortgage loan. Though this
  action, known as deed-in-lieu of foreclosure, won’t allow you to keep your house, it will still
  prevent you from a foreclosure and release you from any responsibility to repay your mortgage
  debt. Moreover, you will also be eligible to receive $3,000 for your moving expenses.

Now, this is a major problem for me. If the Short Sale fails within the 120 days, regardless of the reason,
you have to give back the property to the bank via a deed-in-lieu. Traditionally, the owner can sell his
property until the redemption period ends (here at MN Short Sale, we offer a 6-month redemption
period. Check your state laws in regards to this).

Why are you subjected to time constraints? If there is a Junior Lien, this CANNOT apply! Did the
authorities realize that? You can just deed your house back to the lender. The lender, however, won’t
have a free and clear title unless he goes through a legal foreclosure process and get rid of any Junior

Liens. Brilliant idea, isn’t it?

So actually it’s not all doom and gloom. But can the HAFA program help you? The answer is Yes,
especially if the following points apply:

• The homeowner can afford to pay 31% of his gross income.
• The homeowner has only one mortgage.
• If he has a 2nd mortgage, it has to be willing to comply.
• The homeowner can use an extra $3,000.

With all things considered, we can say that it’s too early yet to tell if this program can really make a
difference. History, however, can tell us something negative. With the Home Affordable Modification
Program (HAMP) failing miserably, time will only tell.

Hope you find this information helpful and informative. If you want to know more about HAFA or
Short Sale, or just want to ask me anything with regards to this subject, kindly send me an email
at Steven@submitmyshortsale.com.