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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 1st implementation date.

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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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