New HAFA Guidelines for Short Sales Should Help Sellers Took Effect February 1, 2011 

April, 2010 the federal government's Home Affordable Foreclosure Alternative Program (HAFA) went into effect.  The program provides short sale guidelines for loans, not owned or guaranteed by Fannie Mae or Freddie Mac, that were the "risky" loans issued during the housing boom such as 0-down loans, option ARMs, and Alt-A mortgages. 

Changes which took effect February 1, 2011 in the HAFA program:

The Treasury Department has revamped its Short Sale program by easing income restrictions and documentation requirements for homeowners facing foreclosure to help streamline the HAFA process and make the program more accessible to homeowners.  

Elimination of the requirement that the borrower's total monthly mortgage payment exceeds a 31% debt-to-income ratio.  More people will now qualify for HAFA.

The property may now have been vacant for up to 12 months prior to signing a short sale agreement but it still must have been the sellers' principal residence prior to relocation.

In regard to second mortgage lenders, they are no longer required to accept 6% of the unpaid balance owed to them but there is still a $6,000 cap on the amount they receive.

The HAFA process is also streamlined by requiring mortgage lenders to provide borrowers with a short sale agreement within 30 days of being requested to do so.  (If borrower has met the eligibility requirements).

The changes which took effect on February 1, 2011 are not retroactive to those already in the process of a HAFA Short Sale.

For the Sellers loan to be eligible for HAFA:

The property is the borrower's principal residence.

The mortgage loan is the first lien mortgage obtained on or before January 1, 2009.

The mortgage is delinquent or default is reasonably foreseeable.

The current unpaid principal balance is no more than $729,750.

The borrower's total monthly mortgage payment exceeds 31 percent of the borrower's gross income.    Removed as of February 1, 2011.

HAFA guidelines are voluntary but major banks and dozens of smaller lenders are expected to participate.

Benefits of HAFA for Sellers:

Financial incentive for lenders to get things moving.  Servicers get $1,000 to cover their costs, and subordinate (2nd mortgage, home equity) get up to $3,000 through a matching arrangement in exchange for relinquishing their lien on the home. 

Borrowers will receive $1,500 to help with moving costs but the major benefit to borrowers is that they are fully released from future liability for the debt.  That will be the rule even in the states that are recourse states.