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HAFA - Will Short Sales Be the Trick to Stop the Foreclosure Flood?

By Richard Linderman

Realizing that the "fixes" put in place by the federal Home Affordable Modification Program ("HAMP") have been an abysmal failure, the Obama Administration and the Treasury Department have reached for a new arrow in their quiver. Beginning April 5, 2010 the new Home Affordable Foreclosure Alternative program ("HAFA") will attempt to assist hundreds of thousands of the delinquent homeowners who could not be rescued under the HAMP program by allowing them to shed their homes through the short sale process. 

Traditionally, a short sale is when the proceeds from the sale of a home are insufficient to fully pay off all outstanding debts and encumbrances recorded against the property.  In these situations, the selling homeowners can either bring funds to the closing to make up the difference, or obtain approval from their mortgage lenders to accept a reduced amount to satisfy their outstanding loans.  

Under HAFA, the lender must offer a short sale in writing to the homeowner within 30 days after the homeowner either is found ineligible for mortgage modification under HAMP or has been ruled unable to sustain payments under a trial plan. Under the new plan, a lender will use real estate agents to determine the value of the encumbered home and this figure will be the  lender's minimum to accept for a short sale. This figure will not be shared with the homeowner, but if an offer comes in that is equal to or greater than this amount, the lender must accept it and proceed with the short sale. 

Under this new program the primary lender will receive $1000 if the short sale is completed. A lender holding a secondary lien could get up to $3000 of the short sale proceeds, or can attempt a short sale outside the program if it does not agree to share.  In addition, the selling homeowner will get $1500 in "relocation assistance".  

While HAFA will attempt to make short sales easier and a more likely alternative to foreclosure,  short sales require significant time and patience by all parties involved. Luckily, with the seemingly continuous delay of the foreclosure process by the New Jersey courts, one thing that delinquent homeowners seem to have is time. 

At the beginning of foreclosure crisis lenders shunned short sales and would regularly refuse to participate in the process. However with the failure of other federal programs to effectively turn the tide of the foreclosure flood, it may now be time for short sales to see their moment in the sun. For condominium and homeowner associations ("Associations"), HAFA may mean fewer empty foreclosed homes waiting to be sold by uninterested and unmotivated lenders.  Another direct benefit of the HAFA program for Associations is that the common assessment liens recorded against the homeowners' units must be paid in full for the short sale to be completed. This will provide Associations significant leverage to ensure that unpaid common assessments are recovered. 

Full post as published by New Jersey Law Blog on March 10, 2010 (boomark / email).