The Obama Administration’s Home Affordable Foreclosure Alternative program, known as HAFA just kicked off on April 5th. The HAFA program promises to streamline short sale transactions. However, read the fine print, and there are a lot of unanswered questions about the program and how it will affect short sale transactions in the “trenches.”
Is the new program really going to streamline the process or create more headaches for the industry?
To begin, it’s important to clarify that the HAFA program is part of the federal Home Affordable Modification Program (HAMP). HAFA guidelines will only apply to short sale or deed in lieu of foreclosure requests made by borrowers who have applied for a HAMP loan modification. That means borrowers will have had to go through all the time, hassle and endless forms under the HAMP modification program before even being eligible for a HAFA streamlined short sale approval. This requirement will likely substantially reduce the number of HAFA-required short sales. HAFA also requires participating lenders to forgive a borrower’s loan deficiency if the lender accepts a short sale. This is a significant deviation from many lenders’ policies. There is even some debate about which lenders actually fall within the mandate of HAFA. For all of these reasons, it is far too early to speculate regarding the impact of HAFA on the current backlog of short-sale requests. It is very unlikely, however, that HAFA is going to quickly streamline the short sale process.
What are the benefits of the HAFA program?
HAFA does create the opportunity for standardization of short sale and deed in lieu of foreclosure forms. Given the wide range of agreements currently in use, standardization will help borrowers to better understand the terms of any negotiation. HAFA also requires lenders to standardize their criteria for the approval of a short sale or deed in lieu. Again, that kind of practice will enable borrowers to better anticipate the likelihood that a particular offer will be accepted and what the acceptance means.
Short sales seem to be picking up right now. But, in the end, will the already in place REO system be a better way to alleviate these troubled loans?
Short sales and REO sales are complementary processes. Both alternatives are necessary to systematically deal with property subject to defaulted loans. All available statistics indicate that when a mortgage loan is in default, the mortgaged property begins to fall in value. It’s easy to understand why. Even the most honorable borrower faced with a loan in default is unlikely to continue necessary maintenance much less improvement. Short sales allow these properties to be sold much more quickly than would occur if a full foreclosure and sale after redemption was required. As such, less reduction in property value results from the short sale alternative.
Not every parcel, however, is going to qualify for short sale treatment. In these cases, lenders will be forced to institute a foreclosure. Accordingly, an effective REO disposition process must be maintained by mortgage lenders. Whether short sales or foreclosure and REO resale becomes the norm for troubled properties remains to be seen. In any event, everyone benefits from a timely process which retains as much value as possible in our homes.
Here in Massachusetts, short sale transactions appear to be on the rise. However, there are plenty of stories of buyers waiting many many months to close. If you are considering buying a short sale property, read our post on short sale transactions, and be prepared to wait it out, which may well be worth it given the reduced price you’ve likely negotiated.