The short sale process, often agonizingly long, may not speed up overnight, but there’s reason to believe that better days are ahead. The federal government’s long-awaited guidelines for standardizing short sales went into effect on April 5th, 2010. The short sale guidelines are part of the government’s new Home Affordable Foreclosure Alternative Program, known as HAFA. The idea is that if borrowers are eligible for the loan modification program but are unable to work out a plan to stay in their home, they and their lenders have a well-mapped route for executing a short sale or a deed-in-lieu of foreclosure.

First, a couple of definitions are in order here. A short sale is created when a homeowner has insufficient equity or cash to discharge (payoff) the debt(s) at closing. It is further defined as “the loan servicer allowing 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.” A deed-in-lieu of foreclosure (DIL) is when “the borrower voluntarily transfers ownership of the mortgaged property to the servicer in full satisfaction of the total amount due on the first mortgage.”

HAFA applies to first-lien mortgages that are not either owned or guaranteed by Fannie Mae or Freddie Mac. Participating servicers (lenders) have to prepare written policies under which they will offer HAFA to their borrowers. The basic criteria to be eligible is that the property is a principal residence, the loan is a first mortgage that originated on or before January 1, 2009, the mortgage is delinquent or will be in the foreseeable future, the current mortgage balance is equal to or less than $729,750, and the borrower’s total monthly mortgage payment exceeds 31% of their gross income.  

Loan servicers have many evaluation steps to take when determining eligibility for HAFA and must also proactively notify borrowers about the availability of these options, especially since borrowers in trouble may not know they exist. Properties must be assessed for their current value and though borrowers may not be charged in advance for the costs, the costs may be added to the total outstanding debt. Borrowers must receive notice in writing if a HAFA short sale or DIL is not available to them along with the reason why.

For each individual short sale, one of the first steps is to establish what is the minimum amount of net proceeds the lender is willing to accept. Each individual servicer must have a written policy based on local market conditions and other factors of how this amount is derived. Borrowers have many obligations in regard to providing appropriate documents, cooperating with their real estate broker to market the property, maintaining the property so it retains its salability, working to clear liens or title issues, and making the monthly payments that are set forth in the original short sale agreement. If a borrower’s financial situation positively changes and they can qualify for a modification or bring their loan to current status, the short sale agreement can be canceled.  Other causes for termination include a change to the property’s condition, the borrower filing for bankruptcy, or the borrower does not make monthly payments as set forth in the agreement.  

Once an offer has been received in a short sale situation, the loan servicer must receive a copy of the contract within three business days along with a buyer’s preapproval letter and any further information dealing with subordinate liens. Then, within ten business days, the servicer must approve or disapprove the offer based on the net sales proceeds that the sale will bring.  

The deed-in-lieu of foreclosure is the other choice loan servicers and their investors can consider.  Generally, once a good attempt to list and market the property falls short, the borrower will then vacate the property and deliver a clear title to the lender by a stated date. Borrowers are then eligible for $3,000 in assistance for relocation.  

A foreclosure sale may be suspended if the borrower is currently awaiting HAFA eligibility response, the return of an executed short sale agreement, or pending a property ownership transfer. During this process, the borrower takes on the responsibility to ensure that their title is clear and marketable. The servicer may or may not assist with negotiations on subordinate lien holders.  These lien holders can be paid no more than six percent (6%) of the total unpaid principal balance until the $6,000 aggregate cap has been reached. These payments are included in the HUD-1 Settlement Statement and are paid out from sale proceeds at the time of closing. 

The Treasury has set forth some reimbursements and incentives if the short sale or DIL can be executed on or before December 31, 2012, and the net proceeds from the sale do not exceed the amount due on the first mortgage at the time the title is transferred. The borrower can receive $3,000 to help with relocation expenses. The loan servicer will be paid $1,500 to cover administrative and processing expenses once the transaction is completed. The investor is paid up to a maximum of $2,000 for allowing part of the proceeds from the sale to go towards paying off subordinate lien holders. This arrangement is a “one-for-three” matching situation in which the investor receives one dollar for every three dollars it pays for lien releases.  

Please keep in mind this is a “surface” view of HAFA. The 45-page document including supplements and more information can be found at https://www.hmpadmin.com/portal/programs/foreclosure_alternatives.html and http://makinghomeaffordable.gov/hafa.html. I believe that positive change is in the works to streamline and speed up the process of short sales and DIL sales and make them less painful to all parties involved. On a local level, we have seen firsthand the waiting time for servicers’ response decrease, while communication and cooperation have improved. Only time will tell if we have reached a turning point in processing “short sales,” however, initial results look good.