Home Affordable Foreclosure Alternatives

For the thousands of homeowners who are underwater on their home loans, relief finally started in April 2010. A new federal program entitled the Home Affordable Foreclosure Alternatives, went into effect recently. Aiming to help streamline short sales, the legislation includes some helpful incentives including cash and relocation assistance.

Some experts believe that having a home affordable foreclosure alternative will slow the tide of foreclosures that have drastically affected markets across the United States and around the world. More than anything, borrowers and lenders alike (not to mention buyers) want to see stability in the market.

Whether short sale legislation will provide the silver bullet is yet to be seen. We had some hope about loan modifications in the U.S., which never panned out, due to the practices of many lending institutions.

As a real estate and land development attorney, I have been working with clients to help them determine how to approach their individual situations to avoid foreclosure and salvage their personal credit.

In general, a short sale is when a lender (also known as a mortgagor) agrees to allow a buyer to purchase the home of a borrower (mortgagee) for less than the price owing on the home loan. While the bank loses money on the transaction in theory, it can actually help the institution save many more dollars that might otherwise be lost in this down market.

When a property is foreclosed, the borrower will often just walk away from the amount owing on the mortgage. The bank then becomes the owner of the property which means maintenance and security costs, let alone the carrying costs of holding the property, month after month, until it is sold. Many times, foreclosed properties are the targets of vandalism, theft and much worse. Once one home in a neighborhood is foreclosed, potential buyers may be scared away.

A single foreclosure house can put downward pressure on home prices across the board - and no one wants that. Like an infection spreading through an entire community, the stigma of foreclosure could be the kiss of death not only for existing homeowners, but for the banks that hold the loans on many of the homes in a particular region.

On the other hand, with a short sale, the bank can immediately transfer a property to a new owner - even if at less than is owed on the loan. This relieves lending institutions of the hassle of managing many properties and protecting their value from continued decline. More importantly, a short sale may save a bank from the stigma of foreclosure.

Effective April 5, 2010, the Home Affordable Foreclosure Alternatives Program contains a number of features that should be attractive to both homeowners and lenders.

First of all, the short sale or deed-in-lieu of foreclosure (DIL) process is streamlined. Lenders must approve or disapprove a short sale contract within 14 days. In addition, the hurdles usually encountered by second and third lien holders are minimized by the program's features which allow some of the short sale proceeds to be distributed to those lenders below the primary lien holder, who may also seek matching money from the federal government.

Second, homeowners who successfully complete a short sale may be eligible for up to $3,000 in relocation assistance.

• $1,500 for servicers to cover administrative and processing costs;
• Up to $2,000 for investors who allow a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders, on a one-for-three matching basis

Third, participating lenders are prohibited from pursing deficiency judgments against borrowers who short sell. In general, this means that homeowners who go through a short sale process may not be subject to a deficiency judgment for the difference between the sale price and the amount still owed on the mortgage after the sale. This should result in a huge sigh of relief since those that go through a short sale probably do not have funds to pay the bank the remaining outstanding amounts due on the loan.

Finally, some banks may be entitled to cash payments under the program.

If you are under water and/or behind on your mortgage, be sure to consult professionals before deciding to do a short sale. These people include your lender(s), an attorney, an appraiser, a real estate broker, etc.

Unfortunately, for borrowers, the HAFA program is voluntary for lenders. This means that unlike the federal loan modification program, banks do not have to participate. In addition, the time that it takes to process a short sale could be several months - or more.

Whether the short sale legislation can help you remains to be seen. When the home loan modification program was announced in March 2009, the Obama Administration estimated that 3-4 million borrowers would be able to lower their payments. As of early 2010, only 170,000 mortgages were modified to lower payments.

If nothing else, be wary and be wise.  Consider your options carefully with the help of hired professionals, if possible.

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