House Lawyer

Taking the hit-or-miss out of a short sale

By Harvey S. Jacobs
Saturday, July 10, 2010

The federal government's Home Affordable Foreclosure Alternatives program, or HAFA, announced in April, may actually achieve some success where its predecessors have failed.

What HAFA will not do is keep homeowners in their homes. It's designed to make the process for getting out of an unaffordable home, without going through foreclosure, more predictable and efficient for all parties involved in the deal.

The reason for optimism is that HAFA removes several impediments to the widespread use of prior programs and provides incentives to all of the players in the workout mess.

For example, homeowners can receive $3,000 toward relocation costs, mortgage investors and loan servicers can receive incentives of $1,500 per loan, real estate agents' undiscounted commissions are honored, and even junior lien holders can receive up to $6,000 in exchange for releasing their liens and agreeing not to pursue borrowers for deficiency judgments.

Formerly, the short-sale approval process was purely hit or miss. The homeowner and the real estate agent would list the home at whatever price they thought it would sell for. Then, once they obtained a bona fide buyer, they would submit the purchase contract to the lender for approval.

The lender could take whatever time it needed to approve or deny the request. This process often took many months and was repeated any number of times. Lenders would attempt to "negotiate" reductions in commissions and other closing costs in exchange for their approval.

Most borrowers were not willing to wait endlessly, and most real estate agents were not willing to sell the same home several times just to earn one reduced commission.

Once an approval was pried out of the lender, it often had unreasonably short deadlines, causing all parties to scramble. Buyers had to mobilize to obtain new loan approvals. Settlement attorneys had to expedite updated title searches, surveys or other lien searches and rush all parties to close before the short-sale approval deadline passed. It was a "hurry up and wait" scenario that pleased no one.

HAFA was created to provide a solution for homeowners who are not able to qualify for permanent loan modifications and conclude that they cannot afford to remain in their homes. HAFA provides a platform for the orderly short sale to proceed using standardized documents and enforceable deadlines. It also provides the way for homeowners to use a deed-in-lieu of foreclosure solution if they are not successful finding a short-sale buyer.

To qualify for a HAFA short sale or deed-in-lieu, the mortgage must be for a borrower's principal residence; the loan balance may not be more than $729,750; the borrower must have incurred some hardship such as a medical emergency or a drastic reduction in income; the loan must have closed before Jan. 1, 2009, and first-mortgage payments (including property taxes, insurance and mandatory homeowners or condo fees) must be more than 31 percent of current gross household income.

For a deed-in-lieu arrangement, borrowers must also be able to deliver clear and marketable title to the home, free and clear of all liens or encumbrances and leave the home in "broom clean" condition. Homeowners are given a minimum of 30 days to vacate the home from the date the short-sale agreement expires or the date of the deed-in-lieu agreement.

Since lenders' participation in HAFA is voluntary, not all loans will be eligible. But all loans owned or guaranteed by Fannie Mae or Freddie Mac are eligible for HAFA. You can see if your loan is eligible by contacting your loan servicer or by going to, which also lists the required documents.

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