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April 5, 2010

The Obama Administration’s guidelines on foreclosure alternatives go into effect today, April 5, 2010. The guidelines, known as the Home Affordable Foreclosure Alternatives (“HAFA”), have the goals of promoting short sales and deeds-in-lieu of foreclosure when mortgage modification is not appropriate. HAFA attempts to achieve its goals by standardizing and simplifying the short sale process and providing financial incentives for mortgage servicers and  home owners to complete a short sale as opposed to a foreclosure.

HAFA requires loan servicers to adopt a written HAFA policy consistent with their investors’ guidelines.  The policy will describe what the servicer will accept concerning short sales proceeds, acceptable closing costs and other financial matters. These terms are determined by the servicer, but once the policy is adopted by the servicer then the servicer must adhere to the policy consistently.

To be eligible for HAFA, a borrower must meet the basic criteria for the Home Affordable Modification Program (“HAMP”). The basic criteria are:

HAFA also states that in order to participate in HAFA the homeowner must not qualify for a loan modification under HAMP, have failed to successfully complete a HAMP modification trial period, or be delinquent on a HAMP modification.  However, it appears that a servicer has the ability to offer a short sale to a home owner who has not gone through the modification process if permitted by the servicer’s HAFA policy.

In order to begin the short sale process, the home owner must request a short sale. Once the home owner requests a short sale the servicer must consider the short sale within 30 days.  As part of the servicer’s consideration of the short sale, the servicer must  confirm the home owner’s HAFA eligibility, determine whether the loan meets the servicer’s short sale criteria under the servicer’s HAFA policy, and determine the minimum acceptable net proceeds.  If the servicer concludes that a short sale is appropriate, the servicer must send a Short Sale Agreement (SSA) to the home owner. The SSA is a straight-forward standardized form that outlines the terms under which the lender will accept a short sale. A copy of the SSA form can be found at

The home owner has 14 days to sign and return the SSA to the servicer, after which the home owner must list the property with a realtor.  When a buyer is found, a contract is signed and a Request for Approval of Short Sale is sent to the servicer within three days. The servicer must then respond to the request within 10 days of receipt. Settlement can then occur.

Junior lien holders (second mortgages, etc.) still have to be dealt with. Under HAFA, junior lien holders will be paid 3% of their debt (up to $3,000 maximum for all junior lien holders.). Servicers may pay more than 3%, but will not receive reimbursement under HAFA.  In order to receive the funds the junior lien holder must agree to release the home owner from all liability. Junior lien holders are not required to consent to a short sale.

Investors will receive $1,000 from HAFA, but must agree to release the home owner from all liability. Servicers will receive $1,000 under HAFA for administrative and processing costs. Home owners will receive $1,500 for relocation costs.

If the home owner is not eligible for a short sale under HAFA, the servicer can still agree to a short sale but the transaction will not be eligible for the HAFA financial incentives.

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