Selling Underwater: HAFA Nuts & Bolts

In a previous article I talked about the introduction of the new Home Affordable Foreclosure Alternatives (HAFA) program (see Selling Underwater – Short Sales under HAFA - 5/24/10).  In this article I want to cover HAFA from the process perspective – how it really works.

The core principal of HAFA is standardization.  Previously when confronted with a short sale the homeowners and agents had to contend with the mortgage servicer on a case-by-case basis under that servicer’s own terms and requirements.  Under HAFA the entire process is streamlined with a framework of standardized qualifications, documents, approval criteria and processing time frames.  HAFA lays out a step-by-step process for all the players to follow.

HAFA recognizes two short sale transactional scenarios:

1. A home that is under agreement of sale with a buyer in place (Contract);
2. A home being offered for sale (Listing). 

The process for the two scenarios is different.  HAFA’s principal focus is on up-front approval in which a homeowner is approved for short sale and enters into a Short Sale Agreement with the servicer at or prior to the time of listing.  I will cover those particulars in detail in my next article.  This article covers the Contract short sale process, where a short sale property is under contract with a buyer in place.  Under HAFA this scenario is referred to as an Alternative Request for Approval of Short Sale (Alternative RASS).

First, here is a summary of the elements of the Alternate RASS process broken into two primary steps:

Step One – Eligibility Requirements.  Does this situation qualify for HAFA?

• The borrower has qualified under the Home Affordable Modification Program (HAMP).
• The property is the borrower’s principal residence.
• The property is not vacant or condemned.  Exception: a borrower to be eligible for HAFA if the borrower provides evidence that he or she was required to relocate at least 100 miles from the mortgaged property to accept new employment or was transferred by an existing employer and has not purchased another home.
• The mortgage loan is a first lien mortgage originated on or before January 1, 2009.
• The mortgage is delinquent or default is reasonably foreseeable.
• The current unpaid principal balance is equal to or less than $729,750.
• The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income.
• The borrower documents a financial hardship¹ and completes HAMP Hardship Affidavit and provides required documentation.

Tip: Under HAFA borrower’s total monthly mortgage payment is defined as: monthly mortgage principal and interest, RE taxes, homeowner’s insurance, flood insurance and homeowner’s association fees.

Step Two – Submit an Alternative Request for Short Sale Approval (Alternative RASS) to the servicer.  The Alternative RASS is a specific package of forms and documentation. 

The Alternative RASS requires the following documents:

• Alternative RASS (Program Terms and Conditions – Terms of Sale) to be completed and signed by Borrower (Seller)
• Copy of a signed listing agreement with a real estate broker (if applicable)
• Executed copy of the sales contract and all addenda
• Buyer’s documentation of funds or Buyer’s pre‐approval or commitment letter on letterhead from a lender
• Information about other liens secured by your home such as home‐equity loans
• Completed and signed Hardship Affidavit form (if applicable)                 

It is important to recognize significance of the first item under Step One: “The Borrower has qualified under HAMP.”  Six simple words – but behind them lies a potential mire of complexity. 

To qualify for HAMP means that a borrower has been approved for mortgage modification under the Home Affordable Modification Program.   Many stories have circulated and I’m sure you’ve heard some of them.  They usually go something like this: after asking for help, submitting and resubmitting documents, a distressed borrower is hung up in limbo for months waiting for their servicer to deliver on mortgage modification promises made under HAMP.  The stories are often emotional as homeowners struggle with bills piling up and mortgage default looming. In fairness, the nation’s mortgage servicers have been deluged with workout requests. As of April 2010, according to US Treasury & HUD, servicers have made 1.4 million modification offers, behind 4.2 million borrower solicitations.  That’s a lot of processing.   

Here’s the key - homeowners in distress need to begin the process with their servicer in advance of their short sale, the earlier the better. HAFA (short sale) may well be the needed solution, but the true first step is HAMP (mortgage modification) approval.  A homeowner is not required to accept the HAMP modification offer if one is made, but they do need to get HAMP qualified to take make use of the streamlining provisions under HAFA.

Look for the next article in this series on the Listing short sale approval process… coming soon.

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¹ HAMP hardship conditions (one or more of the following required):

• Reduction in or loss of income that was supporting the mortgage;
• Change in household financial circumstances;
• Recent or upcoming increase in the monthly mortgage payment.
• Increase in other expenses.
• Lack of sufficient cash reserves to maintain payment on the mortgage and cover basic living expenses at the same time. Cash reserves include assets such as cash, savings, money market funds, marketable stocks or bonds (excluding retirement and emergency accounts – generally equal to three times the borrower’s monthly debt payments).
• Excessive monthly debt payments and overextension with creditors, e.g., the borrower was required to use credit cards, a home equity loan, or other credit to make the mortgage payment.
• Other reasons for hardship detailed by the borrower.