On November 30, 2009, the Obama Administration released guidelines and uniform forms for its Home Affordable Foreclosure Alternatives Program (HAFA). Modified HAFA rules for loans owned or guaranteed by Fannie Mae or Freddie Mac will be issued in coming weeks. HAFA does not apply to FHA or VA loans.
HAFA, which will help homeowners who are unable to retain their home under the Home Affordable Modification Program (HAMP), provides incentives in connection with short sales and deeds-in-lieu of foreclosure. HAFA is a complex program with 43 pages of guidelines and forms. We will keep you updated in future blogs and strive to simplify the jargon to see how this program can help you.
The program:
- 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 under HAMP.
- Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
- Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6%).
- Requires borrowers to be fully released from future liability for the first mortgage debt and, if the subordinate lien holder receives an incentive under HAFA, that debt as well (no cash contribution, promissory note, or deficiency judgment is allowed).
- Uses a standard process, uniform documents, and timeframes/deadlines.
- Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to a $1,000 match for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders. 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.
- Does not take effect until April 5, 2010, but servicers may implement it before then if they meet certain requirements. The program ends on December 31, 2012.
Who is eligible for HAFA?
The borrower must meet the basic eligibility criteria for HAMP:
- Principal residence
- First lien originated before 2009
- Mortgage delinquent or default is reasonably foreseeable
- Unpaid principal balance no more than $729,750 (higher limits for two- to four-unit dwellings)
- Borrower’s total monthly payment exceeds 31% of gross income
What else should I know?
- The deal must be “arms length.” Borrowers can’t list the property or sell it to a relative or anyone else with whom they have a close personal or business relationship.
- The amount of debt forgiven might be treated as income for tax purposes. Under a law expiring at the end of 2012, however, forgiven debt will not be taxed if the amount does not exceed the debt that was used for acquisition, construction, or rehabilitation of a principal residence. Check with a tax advisor.
- The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment, which may hurt credit scores.
- Buyers may not reconvey the property for 90 days.
