Short Sale Foreclosure Fix with Debt Forgiveness is Underway

Short sale or deed-in-lieuThe Obama Administration today launches its first program to offer a short sale, or a deed-in-lieu, to rescue homeowners from foreclosure, while forgiving the difference between the sale price and the amount owed on mortgages.
Home Affordable Foreclosure Alternatives, or HAFA, is intended to reduce the need for potentially lengthy and expensive foreclosure proceedings.
Administrators see it as a substantially better outcome than a foreclosure sale for borrowers, investors and communities. The program’s goals include minimizing the time a property may sit vacant and subject to deterioration, a problem that has plagued the worst hit neighborhoods in some states.
But its greatest benefit is to the desperate homeowner who could not be helped by the more common foreclosure prevention method: a reduction in mortgage payments. Those eligible for HAFA have either failed to qualify or were not able to finish a trial with the government’s primary $75 billion Home Affordable Modification Program, or HAMP.  
The main mortgage relief program continues to be revised as criticism mounts that too few homeowners have received permanent relief, and even fewer have been granted mortgage write-downs.
In a short sale, the servicer allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds may be less than the total amount due on the primary mortgage and any subordinate lien. But with HAFA, the difference is forgiven, and the seller can even qualify for up to $3,000 in relocation assistance.
In a deed-in-lieu of foreclosure (DIL), the borrower voluntarily transfers ownership of the mortgaged property to the servicer in full satisfaction of the total amount due.
The servicer will be paid $1,500 to cover administrative and processing costs for a short sale or DIL. The investor will be paid a maximum of $2,000 for allowing a portion of the short-sale proceeds to pay subordinate lien holders.
Under HAFA, a list price will be determined for the home and the seller is provided an “acceptable sale proceeds” figure – the minimum amount that the lender must receive after sales costs – from the sale of the home.
When an offer is made on the home, the seller will submit the required documentation for approval. 
Once the sale closes, the seller will be released from all responsibilities for repaying the mortgage. In addition, the seller will receive up to $3,000 to help pay some expenses.  The check will be paid by the settlement agent as part of the closing.
If there is money left over from the sale after paying the amount owed on the mortgage, plus the approved sale costs, the seller will not be eligible to receive the $3,000. 
The short sale must be “at arm’s length.”  The property cannot be listed with or sold to a relative, friend or business colleague.
The seller must also agree to share information about outstanding mortgages, liens, credit history and relocation plans with brokers and other third parties that could be involved in the transaction, including U.S. Treasury employees and its financial agents, Fannie Mae and Freddie Mac. 
The HAFA servicer will follow “standard industry practice” and report to the major credit reporting agencies that the mortgage was settled for less than the full payment. “We have no control over, or responsibility for the impact of this report on your credit score,” HAFA program literature states.
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3 thoughts on “Short Sale Foreclosure Fix with Debt Forgiveness is Underway

  • April 5, 2010 at 9:04 am

    Short Sale Foreclosure Fix…no big deal and nothing new! Why is this plan being represented as new and improved? The plan doesn’t cover HELOC / 2nd liens on the property….which is a major concern. At least with a foreclosure you can file bankruptcy and have the other liens reduced or removed. The fact that this specific program has been re-introduced is not even news worth. It does nothing for anyone….who’s in charge?

  • April 5, 2010 at 10:02 am

    not sure what you’re saying. subordinate liens are covered in program. it’s new, part of hamp. there’s a bunch of new guidelines. it starts today. there’s a bunch of incentives for all parties. whether it works or not, is yet to be seen.

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