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HAFA: A New Federal Program May Help With Short Sales

I often get questions from readers about their personal finance issues. Periodically I'll answer them here. If you have questions you'd like to ask, please email me by clicking on the "Contact Ray Martin" link to the left.

Dear Ray,
Last year I lived in a small town in upstate New York and was working for a big company that had layoffs. I could not find a new job locally, so I took a job in Atlanta. Six months later I am still struggling to sell my house in upstate NY, while my family and I are renting a small house in Atlanta. But renting and owning is stretching our finances to the limit. What are my options? Or am I just out of luck?
Since last year, the federal government's Home Affordable Modification Program, or HAMP, has offered programs to encourage lenders to modify or even refinance loans for homeowners who can't afford their current mortgages. The effectiveness of these programs has been a concern because many of the folks who go through it still lack the income to make timely payments even after their mortgage is refinanced or modified. By some estimates, up to half of homeowners with modified mortgages end up "re-defaulting".
The most viable option for many folks -- and this appears to include you -- is to either sell the home through a short sale or transfer the ownership of it to the lender via a deed-in-lieu of foreclosure (DIL). For homeowners, the better option of the two is the short sale. This is better because having a mortgage discharged via short sale on your credit report, while negative, is less damaging than transferring ownership to the lender. Folks who go through a short sale can find themselves viable candidates for a new mortgage in as little as three years, while those who go through foreclosure or DIL may be affected for up to seven years.

But a new program under the government's mortgage modification program, called Home Affordable Foreclosure Alternatives or HAFA, took effect on April 5th, 2010. HAFA provides incentives to lenders and homeowners to participate in a short sale in cases where loans would have been eligible for modification but the homeowners are still unable to afford the home (such as in your situation where you are renting one home and paying the mortgage on another).

Here are a few features of the HAFA program:

  • 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.
  • Uses standard processes, documents, and time frames/deadlines.
  • Provides financial incentives which include $3,000 for borrower relocation assistance, $1,500 for servicers to cover processing costs, and up to $2,000 for investors who allow a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders.
The main problem with short sales have been that lenders, particularly those where two mortgages are involved (i.e., a first mortgage and a subordinate loan, such as a line of credit), have been reluctant to cooperate in allowing a short sale. Another problem is that lenders could take as long as 12 to 18 months to approve the short sale, and by then the buyer has lost interest and moved on.

Hopefully the incentives of the new HAFA program will address these issues and it may work for you.

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