Thursday, May 27, 2010
Selling Underwater: Short Sales under HAFA
In this RE market “short sales” are a fact of life. Although conditions vary from market to market, “underwater” properties represent a big chunk of the existing housing stock. How big? Researcher Zillow.com reported (in February 2010) “21.4% of mortgages are in a negative equity position”, or in plain language underwater. Add those homes with zero to 5% equity, since in a sale a seller’s closing costs reduce the available net by 6% to 8%, the real underwater number may be 30% or more. That’s big.
What does this mean for the resale market? Short sales are here and are to going to be around for a while. If trends continue short sales could comprise 1/3 of the resale inventory, or more in some regions. To be successful agents will need to be proficient in servicing these properties.
Anyone who has done it will tell you, trying to get a short sale approved is a challenge. The approval process is a rough road: long, tedious and foggy. Along the way there is little to no certainty of outcome. Even agents experienced with short sales face uncertainty due to broad variations in servicer requirements, evaluation criteria and decision-making time frames. Each servicer, each transaction, seems to vary on a case-to-case basis.
In November 2009, in full bail-out era mode, the US Treasury responded to the rising tide of housing insolvency with a new federally-mandated, publicly-subsidized solution: introducing HAFA – the Home Affordable Foreclosure Alternatives program, as an expansion of HAMP1. Treasury is upping the ante on servicers to include foreclosure avoidance through selling short, in addition to the workout provisions already mandated under HAMP.
• Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.
• Uses borrower financial and hardship information already collected in connection with consideration of a loan modification.
• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• Uses standard processes, documents, and timeframes/deadlines.
• Provides the following financial incentives:
o $3,000 for borrower relocation assistance;
o $1,500 for servicers to cover administrative and processing costs;
o Up to $6,000 in short sale proceeds to be distributed to subordinate lien holders, on a one-for-three matching basis.
• Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.
Game-changers in HAFA are: 1) the availability of up to $6000 for release of subordinate liens (previously a deal-killer); 2) the ability to get an approved list price (or minimum net proceeds figure) PRIOR TO LISTING; and 3) Borrowers (Sellers) released from debt liability. Also, HAFA’s debt forgiveness provision dovetails nicely with the IRS’s rule change (under The Mortgage Debt Relief Act of 2007) which makes canceled debts non-taxable through 2012.
OK - that’s it. Problem solved. Now it’s business as usual: buying and selling houses. Well, not quite.
Unfortunately, as of this writing, HAFA is half-a-loaf. HAFA may well be a workable solution to vexing problem, but issues remain regarding lender participation. The program expressly excludes FHA or VA loans. And although directed to comply, Fannie and Freddie have not implemented HAFA. So with FHA/VA excluded, and Fannie/Freddie not on board, it’s kind of like the band is playing but there’s no one ready to dance. The good news is the GSEs have been directed to comply, and they will, it’s only a question of when. HAFA contains compliance deadlines and it is reasonable to expect implementation by the end of the 2nd quarter 2010.
The challenge for us today is to become familiar with the HAFA program, understand it and be ready for action when implementation takes hold later this year.
1 The Home Affordable Modification Program (HAMP). Announced in March 2009, HAMP codifies various federal workout programs under the Treasury Department. HAMP is intended to provide refinance and loan modification options for struggling homeowners, under specific Program qualifications such as: owner-occupied, primary residence, at risk of default, with financial hardship, and monthly payment in excess of 31% of gross income. HAMP’s objective is to keep homeowners in their homes utilizing a standardized workout process. Workouts are achieved through mortgage rate and term modifications, and in 28% of approved cases principal forbearance. In its April 2010 report HAMP estimates there are currently 3.7 million HAMP-qualified delinquent mortgages. For more information on HAMP go to: http://makinghomeaffordable.gov/