With millions of Americans possibly facing foreclosure, the demand for help is outstripping supply. The latest Treasury report on the government's Making Home Affordable modification program notes, for instance, that only one-third of the modification trials in place for the last three months have been approved by the servicer for conversion to permanent modifications. So the government has introduced the HAFA (Home Affordable Foreclosure Alternatives) program to help facilitate short sales.
A "short sale" is when you sell your house for less than the loan balance and get the bank to forgive the rest. If, for example, you have a house worth $400,000 and you owe $450,000, you have to get the bank to let you off the hook for the additional $50,000 before you can sell the house. In some ways, this is a compelling alternative to foreclosure for the bank, because if it foreclosed on you, the bank would be stuck with the $400,000 house and have to sell it, and banks are not really in the selling-houses business. Plus, the bank would still only get $400,000 at the end of the day, so even with a foreclosure, it would f a $50,000 writeoff.
Currently the way short sales work is that the seller gets an offer and submits it to the bank, which crunches the numbers and then approves the terms -- or denies the sale. Under HAFA, the bank preapproves terms of sale, the seller then markets the house and submits the buyer's contract to the bank, which has 10 days to approve or deny it. (Additional HAFA requirements are laid out by Marilyn Kalfus in her HAFA story in today's Orange County Register.)
There's a potential for fraud, obviously, because you could sell your house to your sister who lets you stay as a tenant. But Treasury officials think they have guarded against that, notes Jon Prior of Housing Wire, by making you swear that you're doing an arms-length sale, among other things.
Two more important points: You need to apply for a loan modification through Making Home Affordable first, and the help your lender can offer you will vary by lender. Moneywatch colleague Jill Schlesinger, for example, recently heard from a reader looking for $3,000 relocation assistance "from the government" -- and she had to tell him that this of government-sponsored aid goes through the banks, and that every lender's guidelines are different.
Bottom line: I know it's tough to talk to the bank because you may feel like they helped get you into this mess, but they're the place to start. If you want independent counseling, the government is running helplines at 1-888-995-HOPE (1-888-995-4673).