The Obama administration has released detailed guidance on a new Home Affordable Foreclosure Alternatives program that features cash incentives for borrowers, servicers and investors for executing short sales or deeds-in-lieu of foreclosure.
The HAFA program is available for loans that otherwise meet the criteria for the Home Affordable Modification Program but can’t be restructured successfully. The guidelines issued recently as HAMP Supplemental Directive 09-09 only apply to loans not owned or securitized by Fannie Mae and Freddie Mac, which have their own short sale and deed-in-lieu incentive programs.
The new program takes effect April 5, 2010, and servicers are expected to develop their own written policies to implement it. All HAFA loans must first be considered for HAMP modification, and data collected in that process can be used for assessing a possible short sale or deed-in-lieu transaction.
If the servicer hasn’t already done so, the borrower must be advised in writing about the availability of a short sale or deed-in-lieu and have 14 days to mull it over. Servicers are expected to perform a financial analysis to determine whether a short sale or DIL is in the best interest of the investor or mortgage insurer, but the HAMP net present value model does not project such cash flows.
The servicer has to get an independent property valuation that cannot be charged to the borrower, and a title check must also be completed. If neither a short sale nor DIL is available, written notice must be made to the borrower.
Before approving a short sale, the servicer has to determine the minimum net proceeds that will be accepted by the investor. Customary transactions costs must be taken into account. The program requires servicers to use a standard short sale agreement that outlines the responsibilities of the servicer and the borrower that includes a fixed termination date not less than 120 days after the agreement takes effect.
A DIL transaction must include the full release of the debt and waiver of all claims against the borrower. The borrower has to agree to vacate the property by a certain date, leaving it in clean condition with a marketable title.
Servicers may agree to a DIL even if the borrower hasn’t already made a good-faith effort to market the property, if that’s acceptable to the investor.
Servicers may initiate or continue with a foreclosure proceeding during the short sale or DIL process, but the foreclosure can’t be completed while assessing a borrower’s eligibility, waiting for the return of an executed agreement, during the term of a short sale agreement or pending transfer of the property during a DIL.
The borrower’s mortgage payment cannot exceed 31 percent of gross monthly income while a short sale or DIL is pending, and servicers may waive payment altogether. The borrower is responsible for clearing up any other liens on the property, although the servicer may negotiate on the borrower’s behalf. Second lien holders can get up to $3,000 from the proceeds of the sale to release the loan.
Following successful completion of a short sale or DIL, the borrower can get up to $1,500 to cover relocation expenses. Servicers are paid $1,000 to cover administrative and processing costs for these transactions. Investors will be paid a maximum of $1,000 for allowing up to $3,000 in short-sale proceeds to be paid to second-lien holders.
The program features a complete set of required standard documents and reporting requirements. As with HAMP itself, Fannie Mae is serving as the administrator for the short sale/DIL program and Freddie is the compliance agent.