As a Short Sale Specialist, I get asked a lot about the "New Laws" that the Obama administration has implemented under the Home Affordable Foreclosure Alternative Programs (HAFA). 

First off, let me start by saying this; It is NOT a new law. It is a proposed program that lenders CHOOSE to opt into. It is not mandatory and lenders and servicers are not obligated in any way, shape or form to opt in or comply. They MAY only do so, if it is in their best interest.

I am going to talk about some of the program terms and conditions and what my opinion is on them. Now this is only my opinion and I am not an attorney and this is not legal advice. There, that is my disclaimer. What qualifies me to even give my opinion? Well, I have been successfully negotiating Short Sales since 2003 and have dealt with hundreds of Short Sales and the various intricacies of Short Sales. Therefore I am very familiar with what lenders will usually deem acceptable terms for a Short Sale.

There are two ways to go about doing a HAFA Short Sale. The homeowner can request to enter the program via a Short Sale Agreement (SSA), prior to his/her Agent having any type of Short Sale offer, or once the Agent has an offer, the Agent or negotiator can request for an Alternative Request for Short Sale (ARSS). The main difference is that with the SSA, the lender determines what the listing price will be prior to the Agent listing it and the ARSS, the lender has to order an evaluation be done after the offer has been submitted. 

Here is my first opinion on the SSA methodology.  If it is up to the lender to determine the Fair Market Value of the property, that opens up a HUGE can of worms. Why? Because the lender will be basing his opinion on a "Drive By BPO" value, rather than interior value. In case you may not know this, whenever a loan goes into default, the lender will usually order an exterior evaluation or BPO (Brokers Price Opinion) of the property. How these BPOs are done is simple; the Lender hires a Real Estate Agent, pays him/her around $40 to take exterior photos and take a quick look of the outside of the property. The problem with this is that sometimes, the exterior might look good, but since the agent can only go as far as just peeking inside the window, there is no way that they can truly see what the condition of the property is on the inside. Therefore, these drive by BPOs are a very poor way of estimating TRUE market value. If the outside looks good, but the interior has serious issues (i.e. mold, electrical, plumbing, etc.) a property that could be valued at $150K, could realistically be worth $100K because it needs $50K worth of work. I can see many Short Sales falling through due to unrealistic values that the lender may have. If a Short Sale falls through during the program, there are some serious consequences, (that I will talk about later.)

My next point is going to be around the seller responsibilities which are the following:
               
(these are right out of the HAFA document. I will comment on each)

You have until [insert date 120 calendar days from the date of this letter] to sell your house. After that date, this Agreement terminates, unless it is extended by us. During this time you have certain responsibilities. You must:

* Keep your house and your property in good condition and repair and cooperate with your broker to show it to potential buyers.

This is great, I always ask my clients to do this.

* Make partial mortgage payments of $_________ by the first day of each month beginning on __________ 1, 20___ until your house is sold and title is transferred. While you are selling your house, you still legally owe the full amount of your current monthly mortgage payment. However, as part of this Agreement, we will accept this reduced payment until the house is sold and closes or this Agreement expires. These payments do not constitute a modification of your mortgage.

This is optional and the lender will either ask for payments or not. If the lender asks for payments, they will be equivalent to 31% of the homeowners gross income. If the Homeowner is gainfully employed and can make the payments, this works just fine. What about for those poor souls that lost their job, or there was a death or divorce and the extra money was crucial to their financial survival. Then what? Not to mention that if they cannot make these payments the Short Sale will be denied and there are serious consequences. (see below as to why)

* Be able to provide the buyer of your home with clear title. To start, determine if you have other loans, judgements or liens secured by your home, such as a home-equity line of credit or a second mortgage. 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.

* We may allow up to 6% of the unpaid principal balance of each loan (not to exceed an aggregate of $6,000 for all the loans in total) to be paid from the sale proceeds to help get a lien release. If you have these types of liens or loans on your home, please gather any paperwork you have (such as your last statement) and send it to us when you return this signed Agreement. Remember, clearing these other liens and delivering clear and marketable title is your responsibility. 

These two are my favorite. They expect the homeowner to either pay Junior Liens in full, or negotiate a settlement in which the maximum allowed is 6% of the sale price or up to a maximum of $6K AND, the lien holders are supposed to issue a full satisfaction.  So lets break it down; the most they will pay is $6K.  What if there is a Jumbo 2nd mortgage of $150K, do they really think that the 2nd mortgage lender will actually agree to take $6K and give up their right to pursue them for the difference?  I doubt it!!  What if it's a judgment?  Those guys will NEVER issue a full satisfaction.  They might agree to release the lien, but that is about it!!  So do you think that any Junior Lien  holder will play nice?  Maybe!

* At several stages of the short sale process, such as after an offer is received, you will need to complete some paperwork. You are responsible for returning all documents within the time allowed in this Agreement.

Short Sale Program - Additional Information

* You can't list the property with or sell it to anyone that you are related to or have a close personal or business relationship with. In legal language, it must be an arms length transaction. If you have a real estate license you can't earn a commission by listing your own property. You may not have any agreements to receive a portion of the commission or the sales price after closing. Any buyer of your property must agree to not sell the home within 90 calendar days of the date it is sold by you. You may not have any expectation that you will be able to buy or rent [servicer may delete or rent in accordance with investor guidelines] your house back after the closing. Any knowing violation of the arms length transaction prohibition may be a violation of federal law.

I agree with most of it, except the part about having to hold it for 90 days.  This is America people.  The land of opportunity.  No one has the right to tell a buyer what he can or cannot do with a property once he has paid for it (within reason of course).  What if you are a seasoned investor and can turn the property in two weeks.  Have you ever seen the show Extreme Makeover?  Those guys rehab those properties in days!!  Why should they have to wait 90 days to sell that property?  Even FHA, a government agency, has waived their 90 day seasoning requirement.

* We will need to talk to your broker and others involved in the sale. By signing this Agreement, you are authorizing us to communicate and share personal financial information about your mortgage, credit history, subordinate liens, and plans for relocation with your broker and other third parties that could be involved in the transaction including employees of the United States Treasury and it's financial agents, Fannie Mae and Freddie Mac. 

Do we really want the IRS knowing everything?

* The difference between the remaining amount of principal you owe and the amount that we receive from the sale must be reported to the Internal Revenue Service (IRS) on Form 1099C, as debt forgiveness. In some cases, debt forgiveness could be taxed as income. The amount we pay you for moving expenses may also be reported as income.  We suggest that you contact the IRS or your tax preparer to determine if you may have any tax liability.

Talk to your accountant to see if you fall inside the "Mortgage Debt Forgiveness Act of 2007" or if you can claim insolvency.

* We will follow standard industry practice and report to the major credit reporting agencies that your mortgage was settled for less than the full payment. We have no control over, or responsibility for the impact of this report on your credit score. To learn more about the potential impact of a short sale on your credit you may want to go to http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm.

 * If by the termination date of this Agreement, you have complied with all your responsibilities but are unable to sell your home, we will allow you to convey ownership of your home and all real property secured by your mortgage loan (your Property). While this action, called a deed-in-lieu of foreclosure, will not allow you to keep your Property, it will prevent you from going through a foreclosure sale and it will release you from all responsibility to repay the mortgage debt. Additionally, you will still be eligible to receive $3,000 to help with your moving expenses. 

This is the one I have a major problem with.  So if the Short Sale doesn't go through in the 120 days you are allowed, regardless of WHY it failed, you have to give the house back to the bank via a deed-in-lieu.  In a traditional Short Sale you can sell your house up until the day the redemption period ends (at least here in MN where I am from, we have a six month redemption period.  Check your state laws).  Why should you not have all the time allowed BY LAW?  Also, if there is a Junior Lien, this CANNOT apply!  Did the people writing this realize that?  You can deed the property back to the lender, but the lender does not have free and clear title unless they go through a legal foreclosure process to get rid of any Junior Liens.  That was a bright idea!!

             1. You can afford to make payments of 31% of your gross income

             2. You have only one mortgage

             3. You have a 2nd mortgage that is willing to comply

             4. You can use an extra $3,000

The truth is that the jury is still out.  It is still too early to tell if this program will make a difference.  So far, history says NO; with the Home Affordable Modification Program (HAMP) having failed so miserably. Time will tell.

I do hope that you found this information helpful and informative.  If you have any questions about HAFA or Short Sales, please email me at Steven@submitmyshortsale.com