The Home Affordable Foreclosure Alternatives (“HAFA”) program, effective from April 5, 2010 through December 31, 2012, offers hope for defaulted homeowners facing foreclosure under their current mortgage. The government-sponsored program allows homeowners and lenders to side-step the foreclosure process by entering into a short sale agreement (or giving a deed in lieu of foreclosure), which provides an appealing alternative avenue for problem loan workouts.
The main attraction of HAFA, from the homeowner’s perspective, should be that the lender must agree to fully release the homeowner from any liability or deficiency claim on the loan, which, combined with the fact that the sale of the home through a short sale has fewer detrimental effects on a homeowner’s credit score than foreclosure, allows a quicker path to eventual financial recovery. In addition, HAFA may be attractive to homeowners since it offers up to $3,000 in relocation expenses after the sale of the property. The HAFA program establishes a pre-approved set of short sale terms prior to listing the property on the market and uses a standard set of documents and processes, which can be a refreshing change compared to the uncertainty that many homeowners experience during foreclosure.
Lenders may find HAFA enticing as well. As part of the process for determining the pre-approved short sale terms, the lender may set a minimum acceptable sales price for the property and earn a higher rate of return on such sale than might be obtained through foreclosure. Lenders and servicers will receive $1,500 to offset administrative and servicing costs of the program. If a homeowner is accepted into HAFA, he must execute a deed in lieu of foreclosure in favor of the lender at the start of the process, giving the lender some comfort and assurance that the problem loan will ultimately be resolved if a short sale is not consummated.
In exchange for these benefits to both homeowner and lender, there are some stringent requirements and limitations under the HAFA program. As an essential condition precedent to HAFA eligibility, the homeowner must already have qualified for the Home Affordable Modification Program (“HAMP”) and either have been unsuccessful during the modification process or have decided that he is unable to keep the home. The property must be owner-occupied and cannot be re-sold for 90 days after purchase through a short sale, which may discourage investors from participating. Further, HAFA offers a maximum of $6,000 to extinguish junior liens. A property with multiple liens likely will not be an ideal candidate for the program, since junior lien creditors may be unwilling to consent to such a minimal payoff.
The HAFA program creates an outlet for frustrated homeowners and lenders seeking to avoid foreclosure but hoping to find a streamlined, predictable exit strategy for a defaulted mortgage. For an owner-occupied property with only one mortgage that already has been approved for modification under HAMP, the HAFA program may be the most viable and successful option for all parties involved. For more information, please feel free to contact a member of the Williams Mullen Financial Services team, and look for our article next quarter discussing the pros and cons of foreclosure versus deeds in lieu.