Fannie Mae and Freddie Mac HAFA Programs

Many home owners are in financial distress and owe more than their home is worth. In this case, selling their home will not net enough proceeds to pay off their current mortgage. Often, the only option is a “short sale,” in which their lender agrees to accept less than a full payoff to release the mortgage.

HAFA is a Federally sponsored program providing incentives to lenders that agree to short sales. A short sale is a long, difficult process requiring weeks if not months of negotiation with the bank to convince them to accept less than the full amount due. The goal of HAFA is to streamline and standardize the short sale process. HAFA, however, only applies to certain home owners and to lenders that participate in the program.

More importantly, HAFA did not apply to loans owned, underwritten, or guaranteed by Fannie Mae and Freddie Mac. This excluded a large number of loans… until now!

Fannie Mae and Freddie Mac Introduce Their Own HAFA Program

Fannie Mae and Freddie Mac recently announced their own entry into the HAFA Program. Both programs will likely be very similar to the original HAFA program. This development will open the door to a vast majority of distressed homeowners to utilize the HAFA Short Sale Program. And, this means that sellers, REALTORS, and attorneys must understand how the various programs work.

Like the original HAFA program, the Fannie Mae and Freddie Mac programs “piggy back” off of the HAMP Mortgage Modification program. Distressed homeowners must first apply for a mortgage modification under the federal HAMP program. And, like the original program, the new programs provide similar incentives to homeowners and lenders to close a short sale. Homeowners can receive up to $3,000 in “relocation assistance” for completing a short sale.

These programs have just been announced and are not yet in effect. Homestead will continue to provide updates prior to the August 1^st implementation date.

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Short Sale, HAFA, and Foreclosure Definitions and Differences

The following chart provides definitions and differences for various terms and concepts you may encounter in short sales and foreclosures. For a brief explanation of the HAFA Process, see HAFA Explained – The New Federal Short Sale Program. The National Association of Realtors also provides excellent information and resources.   These definitions and terms are a broad-brush attempt to offer clarity and understanding.  Many terms only apply to Wisconsin. 

Term or Concept	Traditional Short Sale	HAFA Short Sale	Foreclosure
HAMP	N/A	Mortgage Modification program through the Making Homes Affordable initiative. HAMP may be required for a HAFA Short Sale.	HAMP Loan modification may be an alternative to foreclosure. The program has been unsuccessful for most home owners.
HAFA	N/A	The short sale program offered through the Making Homes Affordable initiative. HAFA is designed to be a short sale alternative when a loan modification fails.	N/A
SSA Short Sale Agreement	SSA Only Applies to HAFA: Lenders do not agree to a traditional short sale until the end of the process, only after approving all application materials AND the offer to purchase.	SSA is the Lender’s Agreement that outlines the short sale for the home owner. This is agreed to at the time of listing.	N/A
RASS Request for Approval of Short Sale	RASS Applies to HAFA: Request for short sale approval is a long drawn out process of submitting information and often resubmitting it many times.	The Seller or REALTOR submits the RASS within 3 days of having an accepted offer. The lender than has 10 days to approve or deny the request. If approved, lender must close when buyers are ready.	N/A
Term or Concept	Traditional Short Sale	HAFA Short Sale	Foreclosure
Principle Residence	Can do short sale if not principal residence. May have federal income tax consequences for amounts the lender does not collect.	The home must be the seller’s principal residence to qualify for HAFA.	N/A
Timing	Wildly varies, but “Short” does not usually describe the length of time. 3-18Months to complete.	Much faster than traditional short sale. Less than 60 days From application to approval. Lender has 10 days to approve any accepted offer. Can close within normal timelines once the offer is approved.	Foreclosures in Wisconsin can take 8-12 months where a seller does not contest the foreclosure (default judgment). It can take longer if the seller answers the complaint. I can take less time for abandoned or commercial property.
Default			The missed mortgage payment that leads to the filing of a foreclosure
Deficiency	Lender may or may not demand a deficiency. The Deficiency is the amount of money the lender is still owed.	Lenders cannot demand deficiency.	First Mortgage holders generally waive their right to a deficiency in order to speed up the process. 2nd or 3rd lenders usually still retain a right to deficiency.
Term or Concept	Traditional Short Sale	HAFA Short Sale	Foreclosure
Loan Types and Underwriters	Virtually all lenders and underwriters will do short sales. Every lender or underwriter has different standards.	Only applies to non-GSE loans, meaning NOT Fannie Mae or Freddie Mac. Only applies to lenders participating in the HAMP Program.	All lenders can file foreclosure actions.
Mortgage Payments	Sellers generally do not pay mortgage payments during the foreclosure and short sale process. Essentially, they are there “rent free.”	Sellers must continue making mortgage payments, but not more than 31% of their gross income.	N/A
Commission	Lender may negotiate to reduce it. Many investors and programs now require 6% if that is written in listing agreement.	Requires servicers to honor listing agreement if commission does not exceed 6%	N/A
REALTOR	Anyone can participate in a traditional short sale, including FSBO’s, Investors, or non-licensed individuals	HAFA short sales MUST be listed with a REALTOR.	N/A
Term or Concept	Traditional Short Sale	HAFA Short Sale	Foreclosure
Initiating Short Sale Process	Seller, Realtor, or Attorney calls lender, but process generally starts once a Buyer accepts the offer. Process initiated by sending short sale “package.”	Seller calls lender and requests HAFA Short Sale. Lender must proactively offer short sale to individuals who try and fail at HAMP. May require application for HAMP first (although new guidelines allow for direct application for Short sale).	N/A
Cash at Closing	Sellers are rarely allowed any cash at closing. Many lenders require the seller to bring money to closing	Lenders can offer up to $3,000 as a cash incentive for sellers to do a HAFA short sale.	N/A
Credit Consequences	Consult a financial advisor or credit counselor. Short sales can have a significant impact on credit.	Consult a financial advisor or credit counselor. Short sales can have a significant impact on credit.	Consult a financial advisor or credit counselor. Foreclosure will be a significant impact on credit.

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HAFA Explained – The New Federal Short Sale Program

Home Affordable Foreclosure Alternatives Program (known as HAFA) went into effect on April 5, 2010. HAFA allows owners to participate in a “short sale” with standardized procedures and expedited timelines. Short sales are traditionally the hardest and longest transactions to complete and involve dozens of hours of phone calls and paperwork and a very high level of expertise. HAFA, it is hoped, will streamline this process. It is important to note, however, that HAFA does not replace the traditional short sale. Rather, it is a stream-lined short sale process that applies to specific owners who have mortgages with specific, participating lenders.

HAFA Is Not For Everyone

HAFA is not a mandated program that all lenders must follow. Nor does it apply to all distressed home owners. HAFA only applies to lenders that voluntarily participate in the HAMP Mortgage Modification Program. The good news is that this includes most major, national lenders, such as: Citi, Bank of America, Wells Fargo, GMAC Mortgage, Chase, Litton, and many others. The bad news is that the program does not apply to Fannie Mae or Freddie Mac loans, which account for a huge percentage of home loans. Nor does it apply to most smaller, local lenders.

In addition, the program does not apply to the following:

• Loans originated after January 2009,
• Loans with a balance over $729,750,
• Property that is not the seller’s principal residence,
• Loans where the total monthly mortgage payment does not exceed 31% of the seller’s gross income.

In other words, HAFA may make a difference for some distressed home owners. But, it may not even apply for a large group of owners and their lenders. In that case, the traditional short sale process may still be a viable option.

How It Works

HAFA is a short sale program designed to work with the Federal home loan modification program called HAMP. The HAMP program is intended to allow distressed homeowners to stay in their homes by using mortgage modifications that lower their monthly payment. The Federal government recognized that many (if not most) homeowners either did not qualify for HAMP or could not even pay the lowered mortgage payment. HAFA is intended to offer these home owners an option to sell their home through a streamlined short sale process.
Traditional Short Sale

In a traditional short sale, the home owner needs to request a short sale from the lender. The process, in a nutshell, goes something like this:

1. Sellers and/or Realtor contact lender and initiate discussions about short sale.
2. Sellers collect reams of documents to prove to the lender that they cannot pay the mortgage.
3. The Realtor lists the property and tries to find a buyer, having no idea how much the lender will demand or what purchase price will be enough for a short sale.
4. Once a buyer has signed an offer to purchase, the seller submits a “short sale package” to the bank. The package contains all financial information and documentation showing the seller is unable to pay and the offer to purchase.
5. The bank often (usually) requests additional documents and follow up documents and it can take many efforts, phone calls and faxes to finally confirm that the bank has what it needs.
6. The Seller, Realtor, and perhaps attorney spend weeks or months negotiating with the bank over the terms of the short sale, including the purchase price, what closing costs and commissions will or will not be paid, how much money the seller might need to contribute at closing, and whether the bank will forgive the debt or demand a deficiency after closing.
7. The Bank finally approves the short sale based on the purchase price, offer to purchase, and any amendments that needed to be negotiated to get bank approval;
8. The sale finally closes.

This process can take months, and in some cases more than a year. Every lender has slightly different requirements and they each handle transactions differently. Most short sales require dozens upon dozens of long phone calls and an unbelievable level of persistence, patience, and hard work. And, Sellers and Realtors must repeat this process for every second mortgage. Up Until the moment of closing, the seller may not know if the lender will demand a deficiency. If the lender does demand a deficiency, the Seller will still owe the bank after closing.

HAFA Short Sale Process

HAFA is intended to streamline and standardize the procedures for short sales. The HAFA process goes something like this:

1. Seller applies for mortgage modification through HAMP program and is either denied or misses payments;
2. The lender must proactively notify the Seller about the option of a HAFA short sale (or the seller can ask);
3. The lender sends a Short Sale Agreement (SSA) and a blank document called a Request for Approval of Short Sale (RASS);
4. The Seller has 14 days to sign the SSA and return it to the lender along with the Realtor’s listing agreement and a title search showing any other mortgages or liens;
5. The Lender will inform the Seller (even before any buyer submits an offer) what it will take to get short sale approval – either a purchase price or the amount of proceeds needed
6. Once a buyer has signed an offer to purchase, the Seller and Realtor have 3 days to fill out and submit the Request for Approval of Short Sale (RASS) to the lender.
7. The lender has 10 days to accept or deny the RASS;
8. Upon acceptance of the RASS, the Seller proceeds to closing.

The fact that we were able to summarize both processes into 8 steps does not mean that HAFA will be just like an ordinary short sale. Step one will require the seller to submit much of the same documents as a traditional short sale. Indeed, a Mortgage Modification also requires financial disclosures and reams of documentation. But, once this step is done, the rest of the process is much smoother, much faster, and standardized.

Differences Between HAFA and Traditional Short Sales

HAFA improves the short sale process in a number of important ways. But it also comes with some trade-offs. The following chart highlights the differences between HAFA and traditional short sales:

Traditional Short Sale	HAFA
The home owner generally does not make mortgage payments up to the date of closing. They live “rent free” during the short sale process.	Under HAFA, the owner must make mortgage payments up to 31% of their income. Failure to pay the mortgage will disqualify the owner from participating in HAFA.
Lenders can demand a deficiency for the amount of the short-fall. In other words, the debt is not forgiven after closing.	First-Mortgage lenders must waive the deficiency and must negotiate with second-mortgage lenders to waive their deficiency as well.
The Seller could receive no funds at closing.	Sellers can receive “cash incentives” at closing for up to $3,000.
Lenders generally budget up to $3,000 to pay second mortgage holders.	Lenders are given a government incentive of up to $6,000 to pay to second mortgage holders.
The property could be sold by a Realtor or For Sale By Owner (FSBO)	Property must be listed with a Realtor.
Lenders can take as long as they wanted to approve or deny the short sale	HAFA imposes strict and short time-lines on participating lenders
Lenders will not begin to “negotiate” a short sale or even initiate the process until a buyer has signed an offer to purchase	Lenders must start the process at the time or even before the property is listed with a Realtor.
Lender does not give short sale approval until days before the closing.	Lender must approve the short sale, including the amount they will receive within 10 days of receiving the accepted offer.

 

These differences are important to understand. More importantly, it is critical to understand that HAFA
does not replace the traditional short sale. It is an additional tool that applies to certain lenders and certain home owners.

Homestead Title is always available to answer questions and help you with your short sale closings. Look for additional posts in the coming days and weeks.

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