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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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“Why do I need title insurance?”   This is one of the most common questions we receive.  A recent lawsuit by Bank of America may provide some insight.

In the height of the real estate boom, lenders loosened standards and sometimes recklessly approved loans.  Some even approved “liar loans” or “stated income loans” — loans in which the only real documentation to support the loan was the borrower’s good word (or sometimes not so good word).  As it turns out, some title companies were also loosening standards in an effort to win businsess and streamline practices.  One such practice was replacing true “title insurance” with something called a “lien protection plan.” 

A traditional title policy generally requires a title search to discover all liens, rights, and interests in the property.  Then, at closing, the parties can assure that all past liens are paid and no liens remain against the property.  Under the lien protection plans, by contrast, no title search was ever conducted.  Rather, the title company relied upon credit reports and promises and statements (affidavits) of the borrowers that they had no liens.  As it turns out, large numbers of these borrowers did in fact have liens and title problems.  

Bank of America is suing First American Corp. for thousands of unpaid title claims based on this lien protection program called QuickClose.  See LA Times Article, BofA Seeks To Pin Losses on Title Insurer.  The lawsuit is in its early stages and it remains to be seen whether the claims will stand up in court.  Regardless, the moral of the story is clear:  don’t discount the services and value of title insurance done right. 

Homestead Title has, of course, always conducted title searches for all policies.  When we issue title commitments before closing, we make a point of highlighting any potentially problematic items so that none of the parties are unpleasantly surprised at closing…. or worse, unpleasantly surprised after closings.

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The First-Time Homebuyer Tax Credit is the subject of numerous questions and confusion. It is always best to consult an accountant or tax adviser about any tax related questions. This post is intended to offer some background and resources from the IRS. Indeed, everything in this post comes directly from the IRS website. You should consult an accountant or tax advisor about this credit and your specific circumstances.

The Original Tax Credit

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that could be worth up to $7,500. For homes purchased in 2008, the credit was similar to a no-interest loan that must be repaid in 15 equal, annual installments beginning with the 2010 income tax year. The old deadline for receiving the credit was the end of November, 2009. The new law extended the deadlines for buyers that “enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010.”  For more information and common questions and answers, click here.

Homebuyer Credit Expanded & Extended

The Worker, Homeownership and Business Assistance Act of 2009 extended and expanded the first-time homebuyer credit. The new law made the following changes (among others):

  • Extended the deadlines for buyers that “enter into a binding contract to buy a principal residence on or before April 30, 2010 and close on the home by June 30, 2010.
  • Increased the credit to $8,000
  • Expanded the credit to “long time” homeowners who meet certain requirements
  • Raised the income limitations for homeowners claiming the credit.

     

    New Deadlines

    The new law has a two-tiered deadline: (1) The offer to purchase contract must be signed before the end of April and (2) the closing must occur before the end of June.

    Deadlines:        Enter into binding purchase contract on or before April 30, 2010

                              Close on the sale on or before June 30, 2010

    Taxpayers may have the option of claiming the credit on either their 2009 or 2010 returns. The credit may not be claimed before the closing date.  Any question regarding when the tax credit can be claimed should be directed to an accountant or tax advisor. 

    Increased Credit Amount

    The new law increases the credit to $8,000. If the home is purchased in 2009 or later, the credit does not need to be paid back unless the home ceases to be the main residence within a 3-year period after the purchase. In addition, “long-time residents” are now eligible for a $6,500 credit.

    Expansion To “Long-time Residents”

    The tax-credit applies to first-time homebuyers and “long-time” homebuyers. Neither category requires the home to be your very first home. In fact, “first-time homebuyer” means a buyer “who has not owned a primary residence during the three years up to the date of purchase.” A “long-time resident” is a buyer who has owned and used the same house as a principal or primary residence for at least five consecutive years of the 8-year period ending on the date of purchase of the new home as a primary residence.
     

Common Questions and Answers:

Q: Taxpayer A is a single first-time home buyer. Taxpayer B (parent) cosigns for A and does not qualify. Both names are on the mortgage. Can Taxpayer A claim the credit and, if so, how much? 

A. Yes. Taxpayer B is not a first-time homebuyer and cannot claim any portion of the credit, but A may claim the entire credit ($7,500 for purchase in 2008; $8,000 for purchase in 2009), if the home was purchased as Taxpayer A’s primary residence. (Source: IRS.gov webpage)

 Q: Taxpayer signs an offer to purchase before the April 30, 2010 deadline, but the purchase is a short sale that is contingent upon lender approval. Can the taxpayer qualify for the credit if the closing occurs before the June 30, 2010 deadline?

A: Probably. The fact that the offer is contingent upon lender approval should not disqualify the taxpayer from receiving the credit. The short sale lender is not required to have a binding agreement. Rather, the lender’s approval is just another contingency, just like the inspection contingency, the financing contingency or a testing contingency. 

Q: Can a married couple qualify for the first-time homebuyer tax credit if only one is meets the requirements?

A: No. Married couples cannot qualify unless both spouses meet the 3-year requirement. (Source: Turbo Tax Web Site; IRS.Gov site)

 Q: This tax law has already been extended once. Will it be extended again?

A: Your guess is as good as ours.
 

As with all laws and regulations, there are many exceptions, rules, loop-holes, and caveats. Consult an accountant or tax adviser and do not rely upon any website for advice – not even this one. A good place to start is the IRS Website.

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In an effort to end the foreclosure crisis, the Federal Government has been trying to keep owners in their homes through Mortgage Modifications. Now, under a new plan, it will try to make short sales easier.

The Home Affordable Foreclosure Alternative Program (HAFA for short) is a complex program designed to simplify, streamline, and standardize the short sale process. HAFA not only streamlines the short sale process, it allows some distressed owners to walk away with a little cash.


HAFA is an extension of the Home Affordable Modification Program (HAMP) that sought to assist home-owners through mortgage modifications. Unfortunately, the HAMP program has not been very successful. Thus, HAFA offers incentives to both home owners and their lenders to facilitate a short sale. According to the National Association of Realtors, HAFA does not apply to Fannie Mae or Freddie Mac loans, which will issue their own versions of HAFA. The new HAFA program takes effect on April 15, 2010 and provides the following benefits:

  • Short Sale pre-approval much earlier – before even signing a listing agreement or an offer.
  • Prohibits commission reductions below 6% (unless required by private mortgage insurance)
  • Requires full release of any 1st mortgage deficiencies – borrowers must be released from their debt
  • Provides financial incentives to lenders and owners: $1500 for owners and $1,000 for lenders.
  • Institutes uniformed and streamlined procedures that all participating banks must follow.

HAFA is a complex program with dozens upon dozens of pages of guidelines and forms. Fannie Mae and Freddie Mac will likely add hundreds of pages of their own programs.   HAFA is a new program and there is very little guidance.   We found the following resources helpful:

Homestead Title is committed to providing the most up to date information and will be offering updates often.

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New Federal reforms require lenders to follow strict guidelines on disclosing closing fees to their borrowers. The purpose is to give home buyers a more accurate understanding of lending and closing fees and allow them to shop for the best deal.

Lenders must now accurately disclose all closing fees at the time of application and stick to their quote. Nevertheless, some lenders are sidestepping the new rules with improvised and inappropriate practices.

See: “How are those new ‘good faith estimates’ working out?”

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Short Sale Investors are flooding the real estate market, purporting to help distressed home owners in the midst of foreclosure. These investors usually claim to be experts in “short sales” — sales where the bank holding the mortgage agrees to accept less than the full amount due. Some are, many are not, having no training and only the expertise of having lived through their own financial crisis.

How Investor Transactions Typically Work

The investor signs an offer to purchases the house at a discount and tries to convince the mortgage holder (the seller’s bank) to accept a short payoff. At the same time, the investor searches for a new buyer to purchase the home at a marked up price. In a typical example:

The investor will buy the house from the distressed seller for $100,000 and turn around and sell it to the new buyer for $125,000. These two transactions will close on the same day. This is known as back-to-back closings.

What is the Catch?

The problem is that this system may not help sellers and often hurts them. Sellers who use this Investor-Flip model rather than a typical sale with a Realtor, are often left with:

  • A greatly reduced pool of potential buyers
  • A larger deficiency (the debt still left owing to the bank)
  • Increased debts from other liens
  • An increased likelihood of foreclosure

Lets discuss each of these potential problems.

A Reduced Pool of Potential Buyers
The majority of lenders have a “seasoning” requirement. Seasoning refers to the length of time the seller owned the property before the purchase. Lenders want to make sure that the seller owned the property for a sufficiently long period of time: usually 60-90 days. The Investor buys the property and resells it on the same day, thus owning the property for only a matter of hours. There is no seasoning. This means that the distressed seller is limited to finding buyers with unique lenders or buyers willing to pay cash! Thus, by choosing “an Investor,” the seller most in need of available buyers has drastically limited the pool of available buyers.

A Larger Deficiency
A deficiency is any amount of money still owing after the mortgage is released. A mortgage is only a security interest against the property. When it is released or satisfied, it releases the property but it may not release the debt. Many banks will release the property but reserve a deficiency — the right to seek future repayment of any left over debt. Investors do not hide the fact that they will offer the lowest possible purchase price. After all, they need to make a profit too. In many cases, however, each dollar of profit to the investor is a corresponding extra dollar of deficiency.

Increased Debts
In most short sale closings, there is more than one debt to be paid. Often a seller has multiple mortgages, judgments, and other secured debts against the property. Investor transactions reduce the purchase price and thereby increase the likelihood of these debts remaining due.

Increased Likelihood of Foreclosure
Investors market that they can save distressed seller’s from foreclosure. Many do just the opposite. Because the seasoning and disclosure rules limit the pool of buyers and many foreclosing lenders prohibit investor-flip transactions, the odds of a foreclosure increase. Indeed, a typical short sale payoff contains the following requirement: This transaction may not inovolve any third party who received a deed from the seller at, prior to, or after settlement, and the purchase contract may not be assigned. This prohibits investor transactions. A distressed seller, working with an investor, may find out at the last moment that they have wasted their time. And when they do, it may be too late to avert foreclosure.

Finally, these double closings are simply much more complicated and, therefore, more likely to fail. Both the seller’s old lender and the new buyer’s lender need to be given full disclosure and approve of the structure of the deal. The property must have a low enough appraisal to satisfy the seller’s lender and a high enough appraisal to satisfy the buyer’s lender. And the closing instructions and payoff letters must not prohibit this kind of transaction. While this is all possible, it certainly is far more difficult than the traditional short sale.

Why Do Investors Get Involved?

The obvious reason is cash. While investor transactions are difficult and may not close, those that do close often net the Investor $15,000 – $30,000 with little or no overhead or risk. In addition, many investors will consider purchasing the property at the sheriff’s sale. Their involvement ties up the property and prohibits most, if not all, buyers from having a chance of purchasing. Then, the Investor can get an even better deal at the Sheriff’s auction.

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