It must have been some sort of Freudian slip. As I was writing the draft for this article, I kept calling the new short sale program announced late last year by the US Treasury HAHA instead of HAFA (hey, it's only one letter off!). As you read what I've learned, you may start suggesting it be renamed. Why?
As all of the hype in the press and in our own industry has indicated, you'll see that there are certainly some advantages to this new "Home Affordable Foreclosure Alternatives" (HAFA) for families facing foreclosure and in need of a short sale. However, the most likely scenario will result in a deed in lieu (DIL) of foreclosure which will terminate your listing early and provide little benefit to your client.
After I read the 43 page supplemental directive, I found enough things wrong with it to believe it will be as successful as HAMP (Home Affordable Modification Program) is - which, to-date, is about 3%: 66,000 permanent modifications out of almost 2 million in foreclosures.
Let me apologize up front for the length of this article, but if you've read this far, you realize this is one of the most important things for you to learn about short sales in 2010. And I have very good news at the end.
- The seller receives up to $1,500 at closing. This is a huge improvement of getting nothing and will go a long way to motivate sellers to participate in short sales.
- The lender (first mortgage only) waives any deficiency (contrary to popular belief, a short sale by itself does not do this, but that's the topic of another blog post).
- The first mortgage holder orders an appraisal or BPO up front. Similar to FHA, you'll know up front exactly what they want to see an offer at - no guessing!
- Guaranteed 6% commissions (sweet!).
- Uses standard processes, documents and timeframes/deadlines (not sure how they will implement this, but hey, great idea!).
So, what's not to like right? All of the above is probably not news to you since this is what has us all so excited in the industry right? Well when I kept reading that 43 page supplemental directive, here's what else I found - and it will shock you!
The Bad (any one is a show stopper and will result in a DIL):
- Seller must still live in the house. Many of our sellers have moved out of Michigan to find work.
- Seller must continue making payments at 31% of gross income. Hmmm, isn't this part of the problem - they can't afford the payments? How many sellers can commit to this every month?
- Second mortgage lenders must accept 3% of the balance (up to $3,000) and settle account with no deficiency! If you've done a few short sales with second mortgages, you are currently laughing out loud because you know how slim the likelihood of this happening is. So they expect a $20,000 second mortgage to accept only $600 and waive the rest of the balance. Give me a break - not going to happen!
- Seller must apply for HAMP loan modification first. This will burn up 90 days before you can even get the house listed, putting the seller further in the hole, and has about a 3% (so far) chance of getting a loan modification.
- Property must be in (and kept in) "good condition". It's too early to know what exactly what this means and what the impact might be.
- Seller must continue to pay utilities, assessments and association dues. This seems reasonable if they are living in the house (requirement #1), but is very unlikely to happen if they've moved out.
- If short sale is denied, the seller is forced to accept a deed in lieu of foreclosure (DIL). Yes forced! Why, because when they "apply" for the HAMP/HAFA program they sign a contract up front and commit to a DIL if they are declined for the HAFA short sale. With a DIL, they are giving the house to the bank. Yes - giving it to them, it's still treated as a foreclosure on their credit and they do not get the 6 month Michigan redemption period to continue to try to sell the property. Amazing.
The Best News is that if your seller knows up front that they will not qualify, they can request a non-HAFA short sale from their lender. Since early January, 2010, we have had our sellers fill out a form and check off all of the "show stoppers" that would prevent them from qualifying. To no surprise, every seller in 2010 has indicated at least 3 reasons they can not participate and have asked (in writing) their lender to process their short sale has a non-HAFA short sale.
As you can see, if your seller is evaluated for a HAFA short sale, it will add significant time to the short sale process and when they get turned down, it will force them into a deed in lieu of foreclosure (DIL) thereby terminating your listing agreement. So you decide how promising this program is for your sellers. Share your thoughts here!
Dedicated To Your Success,
Short Sale Negotiations: you earn FULL COMMISSION and no fee to buyer/seller - www.GreatLakesShortSales.com