Short Sales Under The Home Affordable Foreclosure Alternatives Program

Last year the Making Home Affordable Program (MHA) was announced. Since that time there have been additional initiatives announced and enacted as part of the overall MHA Program.

These include:

• Home Affordable Refinance Program (HARP)
• Home Affordable Modification Program (HAMP)
• Second Lien Modification Program (2MP)
• Home Affordable Foreclosure Alternatives Program (HAFA)

In all of the announcements of the legislative efforts, the programs are generally summarized by media publications and do not include the details necessary to understand specifically how the new rules apply, if at all.

Announced in November of 2009, the HAFA Program (see Program Will Pay Homeowners to Sell at a Loss) takes effect on April 5th 2010. The primary options available through HAFA include Short Sale and Deed-In-Lieu of Foreclosure (DIL). For homeowners in trouble with their mortgage and needing help, a review of the article above creates the impression that the borrower can sell their property as a Short Sale and the US Treasury Department will provide $1500 in relocation money.

The program does have a provision for providing relocation financial assistance; the language used in the initiative does not guarantee it. A review of the Making Home Affordable update regarding HAFA reveals language that is not definitive, for example the use of “may” instead of a definitive “shall”. It is also important to note that not all lenders or servicers may participate in this program.

To be considered for HAFA, a homeowner must request a Short Sale or DIL under HAFA from a participating lender or servicer. A participating lender or servicer may also consider a homeowner for HAFA within 30 days of the date the homeowner:

• Does not qualify for a modification under HAMP
• Does not successfully complete a HAMP trial period, or
• Misses at least two consecutive payments on a HAMP modification

Short Sales expose the seller to significant risks including California and Federal cancellation of debt tax consequences, capital gains taxes, exposure to deficiency, and possible negative credit consequences. Changing variables such as recourse or non-recourse loan status, the type of property, the seller’s tax situation, financial hardship, the amount of the loss for the seller’s lender, time on market and market value must be considered. Understanding these variables and the risks they may present requires the seller to engage with an experienced Short Sale professional with the knowledge and relationships necessary to best protect them.

For additional information regarding the Making Home Affordable initiatives, please see Making Home Affordable Borrower Frequently Asked Questions.