Metro Detroit Real Estate Voice

Government Springs HAFA without an April Fool's Punchline: Streamlined Short Sale Program Affects Home Buyers & Sellers

HAFA stands for Home Affordable Foreclosure Alternatives Program, but don't let the nice name fool you.   Proof is in the results, so time will tell.  Read on.

Quickly, I will give some perspective on one of many reasons why the current real estate market has become devalued and unstable. However, if you spent a week in my shoes, you may agree with my personal feelings on this program. I also will provide all of the facts about HAFA.  If mortgage servicers and the government do this right, it may help you or many people you know.

So every buyer wants a deal, right? It's a buyer's market... a dream come true?

Not really. Very few truly know the chaotic experiences most buyers incur trying to purchase a home today. What is happening to the sellers? Their problems also mirror the buyer's problems.

Approximately 7,600 single family homes currently are listed for sale in the Southeast Michigan/Detroit Metropolitan area (Macomb/Oakland/Wayne Counties). A vast majority of that number involve sellers who are "hopelessly trying" to sell their property at a price point that pays off their mortgage(s) and closing costs. They are happy to sell and receive little to no money at closing. 

Key word is "hopeless." These properties are flooding the market with a catch-22 situation which leaves frustrated buyers attempting to negotiate offers down to a more realistic, market price butting heads with those "equity strapped" sellers unable to sell. Typically, those same sellers are unwilling to make concessions to sell, such as paying off negative equity or performing a "short sale", which involves negotiating with their lender(s) to take less than what is owed.

Out of those 7,600 homes, about 750 sellers ARE willing to do a short sale, but some buyers avoid this notion like the plague due to the "unknown" factors involved.  These unknown factors create struggles for the real estate industry such as:

• Lengthy "wait time" to get an answer from a lender (most cases are 1 to 6 months)
• Non-standardized processes
• Non-standardized criteria for approval
• Non-standardized forms, and
• Unknown impact to seller's credit

For most sellers, the negative impact to credit defeats the purposes of selling the home in the first place. They want to sell and buy another for a myriad of reasons. In some cases, the impact to the seller's credit is no better than if they would just "walk away."  

To add even more salt to seller's wounds, the Government's has added "tax credit" incentives to buyers. In order to obtain that credit, a buyer must purchase before May 1, 2010 and close before July 1, 2010. Short sales may derail the timeframe and hope of obtaining the desired incentive.

The above explains why so many buyers bypass any property sold by "private sellers" and focus solely on the homes which offer an easy, affordable green light to ownership - the BANK OWNED home.  Out of the above 7,600 homes, almost 1,000 homes are NOT OWNED by private sellers.  So when most of the buyers focus on these homes, two things happen.

• First, many buyers for a limited inventory (basic premise of supply and demand) causes multiple offers on a single property, which leaves many buyers disenchanted, because every time they find a desired house, they roll the dice on receiving an accepted offer. Of the buyers who "win the bid", they also are left with "behind the scenes" struggles not encountered in traditional house sales.
• Second, most banks place properties on the market at very competitive prices, and many times, at prices 20%-50% below market value which spur bidding wars. With a majority of the buying public focusing on the bank-owned home, the impact to values and those private sellers is obvious.

That is why HAFA needs to be explained and embraced.  In theory, the new U.S. Treasury's solution to the short sale/foreclosure crisis will solve all those unknown factors steering buyers and sellers away from this option. This program rolls out in early April 2010. Some lenders may use HAFA earlier. Here are the main points:

1. Property must be seller's principal residence.
2. Sale cannot be related to parties (arm's length transaction).
3. Lender must consider seller for HAFA within 30 days of request.
4. Mortgage on property originated before 1-1-2009.
5. Delinquency or default is foreseeable. Foreclosure proceedings suspended upon application for HAFA.
6. STANDARDIZED FORM/PROCESS:  See the links at the end of this article for more details and downloads.
7. Unpaid principal balance is less than $729,250 and is a FNMA/FREDDIE.
8. The monthly mortgage payment (PITI) exceeds 31% of borrower's gross monthly income.  (If this does not apply, it is uncertain if the traditional short sale method will apply or if #4 is factored.)  Editor Note: This could be the "hanging chad" for many sellers and it is my opinion this requirement should be reconsidered.
9. PRE-APPROVAL for a short sale is an option so a selling price is determined in advance of listing a property for sale. Upon pre-approval, seller has 120 days to sell the property (Editor Note: Gray area - does sell mean contract date or closing date?)
10. Property must be listed with a licensed real estate agent.  Real estate fees to real estate agents will not be reduced less than 6%.
11. Second/subordinate lien holders (2^nd mortgages) can be offered 3% of its principal balance up to a cap of $3,000 each, paid out of closing proceeds.
12. Seller incentive: $1,500 towards relocation expenses. You must move out at closing or represent there are not "tenancy" agreements between seller and buyer.

13.  Impact to credit, seems to be clearer than before:  

• Reporting should be as follows:
• Short Sales
• o Account Status Code = 13 (paid or closed/zero balance)
• o Payment Rating = 0, 1, 2, 3, 4, 5, or 6
• o Special Comment Code = AU (account paid in full for less than the full balance)
• o Current Balance = $0
• o Amount Past Due = $0
• o Date Closed = MMDDYYYY
• o Date of Last Payment = MMDDYYYY

      14.The above is just a basic overview. The program also has specific requirements allowing homeowners to be considered for a "Deed in Lieu" (DIL) of   foreclosure if a short sale is not possible.

If the above does not appear to serve a simple explanation of this government-sponsored program, it actually is. Remember, we do not assume the explanations or the process will be easy.

Hopefully come April, many homeowners and purchasers will embrace and enter into the short sale process. If the plan works and gains popularity, a significant increase in short sale transactions will occur, which in turn, will stabilize the markets with a reduced amount of bank owned homes.

It is the "chicken/egg" relationship. Fewer sellers will walk away from their "under water" position knowing they have an escape that works.  Buyers will open up to seek homes owned by private sellers. 

And for Realtors like myself, I can look forward to less stress and fewer trips to the psychiatrist.

For all the details, see the following links and downloads:

Tutorial for lenders but may give sellers the "inside" point of view:  

http://hmp.launchcontent.com/p/3648439092/DocumentViewRouter.ashx?Cust=36484&DocumentID=a13f710a-a21c-4f85-b1e3-91f81b45475b&Popped=True&InitialPage=player.html

https://www.hmpadmin.com/portal/programs/foreclosure_alternatives.html

https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf

https://www.hmpadmin.com/portal/docs/hamp_borrower/hafa/hafaletters_ssagreement.doc

https://www.hmpadmin.com/portal/docs/hamp_borrower/hafa/hafaletters_ssapprovalreq.doc

https://www.hmpadmin.com/portal/docs/hamp_borrower/hafa/hafaletters_ssaltapproval.doc

Published Wednesday, March 03, 2010 9:18 PM by Al Block