FORECLOSURE DEFENSE BASICS: UNDERSTANDING THE HOME AFFORDABLE FORECLOSURE ALTERNATIVES PROGRAM (HAFA), SHORT SALES, DEED IN LIEU OF FORECLOSURE AND DEFICIENCY JUDGMENTS

So many homeowners are fighting for reasonable loan modifications that will save their homes from foreclosure.  Other people are seeking refuge in a bankruptcy Court (Chapter 13 Bankruptcy, and Chapter 7 Bankruptcy).  Still others are seeking a Deed-lieu-of-foreclosure strategy, while other homeowners who are completely upside down on their properties are either walking away, or seeking to short sale their property.  This is the current state of affairs in the United States, and banks (who have been generously bailed out) are picking and choosing who gets what.  It seems like if you want the bank to perform any loss mitigation for Arizona of California homeowners, you have to basically incentivize them to do something (e. HAMP – Making Home Affordable).

We have previously published an article on the Lender/loan servicers HAMP report card.  The results are not overwhelming.  Click here to view that blog post:http://www.loanmodradio.com/2010/03/hamp-trial-plan-fraud-or-just-off-to-a-slow-start-hamp-lender-report-reveals-some-insights/

So now comes along yet another incentive program that may help some homeowners obtain short sale relief and deed-in-lieu-of-foreclosure relief (and of course stuff more cash into the pockets of the bankers and loan servicers).  This new loss mitigation program is called HAFA – Home Affordable Foreclosure Alternatives Program.  Pretty cool name!  HAFA supplements HAMP.  Servicers implementing HAMP must also comply with the HAFA directives and consider people for short sales and deed in lieu of foreclosure.

What is a short sale? A short sale is a transaction whereby a lender agrees to accept less as a payoff than is owed by the homeowner/borrower by allowing the property securing the debt to be sold for less than the lender is owed.  In some cases the lender will forgive the outstanding debt owed and in other cases the lender may want an agreement from the borrower to pay the deficient loan balance.

What is a deed-in-lieu? This is basically where a homeowner/borrower hands over the deed to the property (with marketable title) to the lender who agrees to accept the deed, thereby eliminating the need to pursue a foreclosure sale.  Sometimes a lender will require short sale efforts before they would accept the deed in lieu of foreclosure.

Why would a lender agree to a short sale or deed in lieu of foreclosure? It costs less for a lender to do a short sale or accept a deed in lieu than it does to pursue a foreclosure.  So where it makes financial sense, the lenders will entertain these loss mitigation measures.

Ok, so let’s take a look at the major points under HAFA:

(1) Program is for HAMP-eligible borrowers who were (a) nevertheless denied under HAMP, (b) qualified but were not given a trial plan, (c) could not make 2 or more trial plan payments, or (d) completed trial plan but no permanent modification was given.  To see what types of borrowers qualify for HAMP see this link: http://www.treas.gov/press/releases/reports/guidelines_summary.pdf(generally must be borrowers principle residence, first mortgage loan must not exceed 729,500, and payment must be in excess of 31% of borrowers gross monthly income).

(2) Program takes effect April 5, 2010 and “sunsets” December 31, 2012.

(3) The hardship letter and financials on file with the lender / loan servicer can be used for the short sale or deed-in-lieu.  (Goal is to make easy for those denied under HAMP to be reviewed for the short sale or deed in lieu).

(4)  HAFA allows borrowers to receive pre-approved terms (ex. minimum acceptable net proceeds) before listing their property for sale.

(5)  All short sales must be at “arms length” (meaning, you cannot sell the property to any relatives or other persons with a close personal or business relationship).  The buys of the property are bound to not re-convey the property – ex. back to the borrower – within 90 days.

(6) HAFA prohibits loan servicers from requiring a commission reduction in the agreed real estate listing agreement between the seller and agent (up to 6% is protected).  However, Servicers may use short sale assistants on their end that must be paid a specified portion of the commission.

Here is Freddie Mac’s Short Sales commission policy: http://www.realtor.org/wps/wcm/connect/c126d4804f53ab6586b8c74e813808c1/Freddie+Mac+Short+Sales+Policy+10.27.09.pdf?MOD=AJPERES&CACHEID=c126d4804f53ab6586b8c74e813808c1

And here is Fannie Mae’s short sales commission policy: http://www.realtor.org/wps/wcm/connect/7e6786804018046f8d0cfd205f470b6e/Fannie+Mae+Short+Sales+Policy+10.27.09.pdf?MOD=AJPERES&CACHEID=7e6786804018046f8d0cfd205f470b6e

(7) Requires borrowers to be fully released from facing deficiency judgment liability judgments on the first mortgage (and on the second mortgage as well if the junior lien holder receives any incentives under HAFA).  This means they cannot require a deficiency promissory note be signed, seek a deficiency judgment in a court of law, or demand any other cash contribution from the homeowner seeking the short sale.

(8) HAFA requires the use of Standard forms, process, timelines, and deadlines.  See Supplemental Directive 09-09 here: https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf

(9) HAFA requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy consistent with investor guidelines.   This means the servicer can have its own internal policies for implementing HAFA which policy can take into account local markets and the severity of financial loss, timing of pending foreclosure actions, etc.  Yes, the discretion on all loss mitigation efforts is always left to the discretion of the servicers.  Good for them, potentially bad for homeowners.

Other factors that may be taken into account in dealing with whether the homeowner will be permitted to seek a short sale or deed in lieu of foreclosure are (i) Expected recovery if foreclosure is pursued; (ii) current condition of title / encumbrances, (iii) borrowers financials submitted under HAMP, (iv.) property valuations, and (v.) effect of short sale/deed in lieu and perhaps (vi) predatory lending litigation and truth in lending (TILA) rescission risks.

(10) HAFA permits a 90-day timeline that gives homeowners the ability to sell their homes in a short sale without risk of foreclosure.  See our timeline discussion below.

Here is a list of the HAMP participating loan servicers:  http://www.foreclosuredefenseresourcecenter.com/2010/03/hamp-trial-plan-permanent-modification

(11)               HAFA provides financial incentives for borrower relocation assistance following the short sale ($1,500); incentives to the servicers to cover short sale processing costs ($1,000); and incentives for investors matching up to $1,000 for each lien holder ($3,000 total).

(12) Credit impact following a short sale or deed in lieu of foreclosure: following a short sale, the creditor will report to the credit reporting agencies that the mortgage was settled for less than full payment (this will still impact your credit score but should not impact as much as a foreclosure).

(13) Potential tax implications for debt forgiveness following a short sale or deed in lieu: Borrowers pursuing a short sale must investigate the potential tax ramifications involved, usually by discussing this with a tax accountant, CPA or tax lawyer prior to selling their property.  In some cases, debt that is forgiven that does not exceed the amount borrowed to acquire, construct, or rehabilitate property may not be treated as taxable income.  Again, contact a tax professional.  We will be writing a separate blog on general overview of tax issues in the loss mitigation context.

GENERAL TIMELINE UNDER HAFA:

(1) BORROWER IS REVIEWED FOR HAMP LOAN MODIFICATION BUT IS DENIED, OR CANNOT COMPLY WITH TRIAL PLAN OR IS NOT OFFERED A TRIAL PLAN ETC.  SEE CONDITIONS ABOVE;

(2) BORROWER EITHER REQUESTS A SHORT SALE OR DEED IN LIEU OF FORECLOSURE AND/OR THE LOAN SERVICER SENDS BORROWER NOTICE OF RIGHT TO BE REVIEWED FOR HAFA’S SHORT SALE AND DEED IN LIEU OPTIONS WITHIN 30 DAYS:

(3) IF BORROWER FAILS TO RESPOND WITHIN 14 DAYS, THE RIGHT TO BE REVIEWED UNDER HAFA IS LOST;

(4) IF REQUESTED, BORROWER RECEIVES A SHORT SALE AGREEMENT FROM LOAN SERVICER.  THIS AGREEMENT DISCLOSES THAT BORROWER HAS AT LEAST 120 DAYS TO SELL PROPERTY FREE FROM FORECLOSURE RISK AND HAS SPACES FOR THE BORROWER AND REAL ESTATE BROKERS SIGNATURES.  THE LISTING AGREEMENT SHOULD BE ATTACHED AND RETURNED WITH THIS DOUCMENT AS SHOULD THE HARDSHIP FORM AND INFORMATION ON JUNIOR LIEN HOLDERS AND THE PROGRESS OF ANY NEGOTIATIONS WITH THESE LIENHOLDERS.

NOTE:  YOU WILL MOST LIKELY BE DENIED A SHORT SALE IF YOU HAVE NOT NEGOTIATED YOUR SECOND MORTGAGE AND GET THEM TO RELEASE YOUR LIEN.  THIS SEEMS PRETTY BRUTAL BUT ALSO SEEMS TO BE A REQUIREMENT TO GET YOUR SHORT SALE APPROVED.

(5) BORROWER HIRES A SHORT SALES AGENT AND LISTS PROPERTY FOR SHORT SALE IN LOCAL MLS;  (SHORT SALE BROKER MUST SIGN DOCUMENT LISTED ABOVE);

(6) SELLER GETS AN OFFER TO PURCHASE THE PROPERTY (MUST BE AN ARMS LENGTH TRANSACTION);

(7) BORROWER SUBMITS A COMPLETE SHORT SALE PACKAGE TO LENDER INCLUDING A REQUEST FOR APPROVAL OF SHORT SALE (RASS); LOAN PREQUALIFICATION LETTER FOR THE BUYER, AND MUST FILL OUT A FORM INDICATING THE TRANSACTION DETAILS.  A COPY OF THE PURCHASE AND SALE AGREEMENT MUST ALSO BE ATTACHED AND CERTAIN REPRESENTATIONS, MADE UNDER PENALTY OF PERJURY, MUST ALSO BE GIVEN.

(8) THE LOAN SERVICER CONDUCTS AN EVALUATION OF THE SHORT SALES TRANSACTION USING THE FACTORS DESCRIBED ABOVE TO SEE IF BORROWER QUALIFIES FOR THE SHORT SALE OR DEED IN LIEU OF FORECLOSURE PROGRAM;

(9) THE LOAN SERVICER MUST ACCEPT OR DENY THE RASS WITHIN 10 BUSINESS DAYS OF RECEIVING THE RASS FORM AND ADVISE BORROWER ACCORDINGLY.

(10) IF LOAN SERVICER AGREES TO THE SHORT SALE IT MUST ALSO AGREE TO WAIVE ANY DEFICIENCY JUDGMENTS FOLLOWING THE RECEIPT OF SALE PROCEEDS AND CANNOT DEMAND ANY NOTES BE SIGNED AGREEING THE PAY THE DEFICIENCY;

(11) ESCROW IS OPENED – TYPICALLY A 45 DAY ESCROW – AND THE TYPICAL REAL ESTATE TRANSACTION FUNCTIONS PROCEED (APPRAISAL, FINANCING, SELLER DISCLOSURES, INSPECTIONS, ETC.);

(12) THE BUYER OF THE SHORT SALE MUST BE A BONA FIDE PURCAHSER (ARMS LENGTH TRANSACTION) AND THEY CANNOT RE-CONVEY THE PROPERTY FOR AT LEAST 90 DAYS AND CANNOT HAVE AN AGREEMENTIN PLACE TO LEASE THE PROPERTY TO THE FORMER HOMEOWNER AS A TENANT ON THE PROPERTY;

(13) FOLLOWING THE SHORT SALE RECEIPT OF FUNDS, THE SENIOR LIEN HOLDER MUST RELEASE THEIR FIRST MORTGAGE LIEN WITHIN 10 DAYS AND CANNOT PURSUE ANY DEFICIENCY JUDGMENTS.

(14) THE SELLER WILL THEN BE ENTITLED TO $1,500 RELOCATION ASSISTANCE PAID OUT OF ESCROW PROCEEDS.

(15) TAX AND CREDIT IMPLIACATIONS ARE DISCUSSED ABOVE AND IN OTHER BLOGS.

IF YOU ARE A CALIFORNIA OR ARIZONA HOMEOWNER INTERESTED IN PURSUING HAFA SHORT SALE OR DEED IN LIEU OF FORECLOSURE YOU NEED TO ACT FAST.  CONTACT OUR OFFICE TO DISCUSS YOUR CASE AND DISCUSS IMPLICATIONS COCERNING DEFICIENCY JUDGMENTS AND NEGOTIATING WITH SECOND LIEN MORTGAGE HOLDERS AND JUNIOR LIEN HOLDERS.

KEYWORDS: Arizona deficiency judgment / Phoenix HAFA lawyer / Scottsdale HAFA lawyer / Short sale attorney / Short sales lawyer / HAMP short sale program / deed-in-lieu-of foreclosure / Arizona foreclosure lawyer / Phoenix Foreclosure Lawyer / Phoenix foreclosure attorney / Scottsdale loan modification lawyer / Phoenix loan modification lawyer / Phoenix loan modification attorney / Lis Pendens / Quiet Title / Injunction / Arizona loan modification lawyer

Google our other foreclosure defense blogs on Arizona Deficiency Judgments and HAMP Loan Servicer report Card and Tax Issues in Arizona Short Sales (use keyword Vondran).

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