Introduction

On February 18, 2009, the Obama administration announced the creation of the Making Home Affordable Program (MHAP), which is intended to help resurrect the housing market by assisting homeowners to stay in their homes and avoid foreclosure. MHAP includes loan modification and refinance programs that are presently in effect. Participation in MHAP is mandatory for the 2,300 servicers of loans owned or guaranteed by Fannie Mae or Freddie Mac. Participation for all other servicers is voluntary but strongly encouraged. The servicers that elect to participate are contractually bound to agree that, among other things, they will evaluate borrowers for the MHAP programs, including loan modifications.

As of January 2010, 110 servicers had signed on to MHAP, a significant increase from the 14 servicers that had signed on as of May 2009. Given the number of loans owned or guaranteed by Fannie Mae or Freddie Mac and the number of servicers that have signed on to MHAP, approximately 89 percent of all the eligible loans in the United States are now covered by MHAP.

Beginning April 5, 2010, another component of MHAP, the Home Affordable Foreclosure Alternatives (HAFA) program, will go into effect. HAFA offers foreclosure alternatives by way of providing incentives to servicers and borrowers to pursue short sales and deeds in lieu of foreclosure. Below is a discussion of HAFA's key components and future considerations.

The HAFA Procedure

HAFA is available to a borrower who meets the general eligibility requirements for MHAP modification but does not qualify for a modification or was unable to complete the modification process, i.e., could not make all the required payments during the trial or modification period. The general eligibility requirements for MHAP modification are that (1) the property is owner occupied; (2) there is an unpaid principal balance that is equal to or less than $729,750 for a single-family home; (3) there is a first lien mortgage that was originated on or before January 1, 2009; (4) the borrower's monthly mortgage payment is greater than 31 percent of his or her monthly gross income; and (5) the borrower cannot afford the mortgage payments, due to financial hardship.

Under HAFA, after determining that modification is not possible and prior to moving toward foreclosure, the participating servicers must determine whether the subject borrower qualifies for a short sale (i.e., a sale of the property for less than the amount owed to the lender on the mortgage). The servicer will consider the property's value, the expected marketing time for the property, the condition of the title, and whether the net sales proceeds will exceed what would be recovered in a foreclosure. To establish property value and the minimum acceptable net return (pursuant to investor guidance), the servicer must obtain an appraisal performed under the Uniform Standards of Professional Appraisal Practice or broker price opinion(s). The servicer must also provide the borrower with instructions as to the list price of the property and the permitted reductions in price. The servicer must approve an offer to purchase if the net sales proceeds available for payment to the servicer are equal to or exceed the minimum acceptable net return previously determined by the servicer.

HAFA also requires that participating servicers utilize standardized short sale documents published by HAFA, which are intended to streamline the short sale process. Under this standardized process, servicers must allow borrowers at least 120 days (but no more than one year) to market and sell the property. If the borrower fails to sell the property within the agreed-upon time period, the servicer may consider accepting a deed in lieu of foreclosure.

To encourage successful completion of a short sale, HAFA offers the following incentives:

  • Payment to servicers of up to $1,000.
  • Payment of up to $1,500 to borrowers to help with relocation expenses.
  • Reimbursement to investors of up to $1,000 for payments made to junior lien holders to release their claims. This will be done on a one-for-three matching basis, i.e., for every $3 that the investor pays to the subordinate lien holder, the investor will receive $1 of reimbursement.

Future Considerations

Beginning April 5, 2010, the 110 servicers that are voluntarily participating in MHAP must start preparing to devote substantial resources to evaluating short sale opportunities for borrowers who did not qualify for MHAP modification. They will not be able to seek foreclosure until they have done so. Moreover, failure to adhere to HAFA procedures will expose those servicers to potential legal liability for failing to fulfill their contractual obligations as participants in MHAP and possibly expose them to claims by borrowers alleging that the borrowers were deprived of the opportunity to keep their homes.

The servicers of the remaining 11 percent of eligible loans that have not yet signed on to MHAP have until October 3, 2010 to decide whether they want to participate. The deadline was extended from the original date of December 31, 2009, but it is not known whether there will be another extension. The benefit to be considered is the potential that the investor/servicer will actually end up earning more from a combination of the incentives and the net proceeds of the sale than it would if it were to engage in a lengthy and expensive foreclosure of the property. Potential drawbacks include that the lender will be required to approve a short sale if the net sales proceeds are equal to or exceed the minimum acceptable net return previously determined by the servicer, even if it wants to reject the offer for some other reason. Further, obtaining the release of claims from a junior lien holder may be costly.

Time will tell whether this government-sponsored incentive will serve its intended purpose. One would expect that its success will depend on the values attributed to properties for which short sale approval is sought and the magnitude of the losses a lender is required to absorb from such a sale.