Section Two - Foreclosure Alternatives
We already covered what a short sale is in the Background Blog. So under this program the servicer will allow the borrower to list the property for less than the full amount owed and the net proceeds from the sale are accepted as a short payoff of the mortgage. The servicer accepts the short payoff in full satisfaction of the total amount due on the first mortgage. Now the short sale must be an arm length transaction. That means a transaction between two otherwise unrelated or affiliated parties. So you can't have your Grandma buy your house for you at a discount.
In the deed-in-lieu (DIL) situation the borrower basically gives the property back to the servicer. The servicer then issues a full satisfaction of the total amount due on the mortgage. To do a DIL the property needs to have no encumbrances except the 1st mortgage. That means no 2nd mortgages, liens or judgments that have attached to the property. Typically a servicer will ask that the property have been marketed and a short attempted before considering a DIL. But that is not written in stone - the servicer may accept a DIL without the borrower first attempting to sell the property if the circumstances are acceptable to the investor.
In either scenario, under HAFA, the servicer must not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower. THIS IS BIG!
We are reminded that short sales and DILs are complex transactions (DUH). The HAFA program attempts (my word and italics) to simplify and streamline these transactions.
Some of the new features under HAMP are ...
•· Allows the financial and hardship information collected under HAMP(modification) to be used for the SS and DIL process No more duplicating documentation already done for the loan modification application
•· Allows borrowers to receive pre-approved short sale terms prior to property listing the property This should be interesting. I will post a sample short sale agreement (SSA) in Section 5 blog
•· Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement Capped at 6%
•· Requires that borrowers be fully released from future liability for the debt.
•· Uses standard processes, documents and timeframes. Will post samples with future blogs
•· Provides financial incentives to borrowers, servicers and investors. Covered in the next few sections.