New Rules: Short Sales on Steroids

The new federal guidelines for short sales, called HAFA [Home Affordable Mortgage Alternative] came into being November, 2009 and just recently became operational. Most loan servicers and banks are now using HAFA.

What’s So Great About HAFA?

Really,  what’s the big deal? Everybody knows short sales are tedious, take forever and are a last resort for the homeowner, right? Not exactly–HAFA does streamline the process, shorten the time periods and provide significant incentive s for both short sellers and their banks. In short, it’s a win-win for all parties.

If you’re a homeowner considering a short sale, then,  it’s a fairly big deal, assuming that it works out as envisaged by the federal government.  Home sellers can get up to $3000 in relocation money from the transaction. That’s very helpful to distressed homeowners who may want to rent and need to pay a deposit. And, another very big deal is that homeowners would be guaranteed from their banks to have no deficiency judgments. Coupled with the 2007 law foregoing any tax on defaulted income, that leaves short sellers really free and clear once they close escrow on their underwater properties.

What Do the Banks Get Out of HAFA?

We have to ask why would the banks want to do this? What’s in it for them? Here, too, are some very positive reasons. Banks prefer short sales over foreclosures because banks save about 20% on average by doing the short sale. This program simplifies the process, streamlines it, and allows the mortgage servicers $1500 to cover administrative costs with an additional  $2000 to the investor who actually owns the loan.  Banks do better with this program. Altogether, sellers, servicers and investors are collecting $6000 on each HAFA transaction. Not too shabby.

Now the Big One: Who is Eligible?

If your principal residence qualified for a loan mod under HAMP [Home Affordable Modification Program]  and you can’t pay or have fallen behind you are eligible. If this is an investment property or rental, you are not eligible.  If your loan is FHA or VA, you are not eligible. Both FHA and VA have their own short sale programs with different rules.

Having applied for the HAMP program is crucial. If you applied and were rejected, you are eligible. If you entered a trial period and fell by the wayside, you are eligible. If you received a permanent loan mod under HAMP and have missed at least two payments, you are eligible.

Let’s say, you discover you probably are not eligible for HAMP or HAFA, what should you do? Don’t worry. The servicer will still do a short sale; it will simply not be using the HAFA guidelines. We’ve been doing what seems like zillions of short sales for the past three years, so the process there has become more streamlined as well. If you need help or want to do a short sale, make sure to call me at 626-641-0346. I can even help if you are outside of California.

Oh-one last thing-if you are an investor who would like to purchase a HAFA short sale then flip it, you must wait for 90 days.

Here’s the National Association of Realtors’ video on the topic

NAR on HAFA

Lower Your Mortgage Balance

Gradually, the government’s new programs aimed at mitigating the mortgage crisis are coming online. The latest one debuted October 1st.  It’s called Help for Homeowners, and it is for those who have FHA mortgages. Note: only FHA mortgage holders are eligible for this one. FHA [Federal Housing Authority] loans are generally for first-time buyers.

Help for Homeonwers–October 1st marked the release of FHA’s Help for Homeowners program.  This program allows homeowners who owe more than the value of their home to refinance into a 30-year-fixed loan.  The best part is that a client’s loan balance will be reduced to  90% of the current value.  So, if you owe $350,000 and the current value of your home is $300,000, your new loan will be $270,000. This is a very good deal.

Any excess will be required to be forgiven by the lender. In the above example, that would be $80,000 forgiven.  Further, the FHA eliminates any subordinate liens and gives the lender  a coupon.  What does the homeowner give the FHA in return? The homeowner agrees to share a percentage of the future appreciation with FHA.  FHA will use this appreciation equity when the home is sold to reimburse subordinate lienholders.

This is a fantastic program and will help many upside-down homeowners.  Here in Southern California this wonderful program may not offer much help, though, for several reasons.  Prices here were so high that FHA loan limits did not apply to most purchases. Also, so many easy-credit, no-money-down, stated-income loans were available that most borrowers bypassed the strict requirements of FHA. As a result, most SoCAl homeowners, newly-minted  in the last 3 to 5 years, would not have FHA loans.

Foreclosure Conundrum

Lately, we have heard that 1 in 3 homes bought in California is a foreclosure. In the first quarter [Q1] of this year, 47,171 homes were repossesed in California, a record. Also in Q1 California public records show 110,000 notices of default [NODs], up 143% over last year. An NOD is the first stage of the foreclosure process. Typically, 3 in 10 NODs result in foreclosure.

While some may see bargains on the horizon, there are also horrendous social costs involved in each and every foreclosure. On such a massive scale, whole neighborhoods could be devastated, school districts and tax bases adversely impacted. Such dislocation,often resulting from job loss, has other consequences, such as divorce, suicide, physical and mental trauma, which, in turn, impose more costs upon society as a whole.

Bearing this in mind, last year the Federal Housing Administration [FHA] reportedly paid $158.6 million to keep lenders from foreclosing, up 61% from 5 years ago. Six in 10 homeowners with NODs were able to stay in their homes.

Some Democrats in Congress, notable Barney Frank, Chair of the House Financial Services Committee, are promoting bills to refinance borrowers into FHA loans, guaranteed by the government. Frank estimates this may entail up to 2 million mortgages at a cost of $3 to $6 billion. Foreclosure rates among those with FHA loans are much lower, primarily because of such “workouts”. A “workout” may cost from $136 to $7,169 per year. Already, the FHA workouts have saved $2 billion in loans and prevented the ravaging of whole neighborhoods. Today, after all costs are factored in a foreclosed home brings the bank on average about 55 cents on the dollar. Multiplied by millions, this is a potentially stunning blow to the mortgage industry and, by extension, the financial markets, just now staggering back to normalcy.

But is such a bill really a good idea? Other Dems and many Republicans say the system would be rife with abuse. They say the market should be left to work itself out. Cheating homeowners won’t make payments anyway. The FHA is pushing loan servicers to make modifications that won’t last. In a declining market, homeowners will eventually lose their homes anyway, pushing foreclosed homes onto the market in the future resulting in even lower returns.

The Department of Housing and Urban Development [HUD] which oversees FHA strongly opposes such congressional action. Its position is that such a law would force the agency and taxpayers to take on excessive risk.

The question then becomes how far should the government go to prevent the escalating social costs of foreclosure? Assuming the money would be spent anyway, [and we can’t assume this really] is preventing foreclosures the best use of the taxpayers’ dough? What is the social cost of 2 million families forced from their homes? Where is Solomon when we need him?