The April 2010 guidelines for short sales and deeds in lieu of foreclosure are geared primarily towards the borrower (seller) and the lender (commonly called a service provider or servicer). However, the guidelines offer benefits to buyers of short sale property, too.
Before I answer your question, I need to provide background information on deeds in lieu of foreclosure, short sales, and government programs meant to stabilize prices of homes and assist distressed homeowners.
If you are a homeowner wishing to sell your home, your first task is to verify the type of loan (mortgage) you have. If you do not know, speak with your mortgage specialist, real estate agent, or an attorney in your state who can review your mortgage contract. If the loan is FHA, VA, Fannie Mac, or Freddie Mac, there are new and different provisions of these guidelines, some of which have not been released as of the date of this answer. If you do not have a FHA, VA, Fannie Mac, or Freddie Mac loan, then the guidelines may apply if your servicer is participating in this program. Most are.
To put the Home Affordable Foreclosure Alternatives Program (HAFA) in context, we need to discuss the two primary alternatives to foreclosure.
Deed in Lieu of Foreclosure at a Glance
In a deed in lieu of foreclosure, the property owner gives the property to the lender voluntarily in exchange for the lender canceling the loan. The item transferred is the deed to the property. The lender promises not to initiate foreclosure proceedings, and to terminate any foreclosure proceedings already underway. The lender may or may not agree to forgive any deficiency balance that results from the sale of the property.
An overlooked downside to deeds in lieu of foreclosure in general is the potential for liability for the deficiency balance. However, under HAFA, participating servicers must forgive the deficiency balance for a deed in lieu of foreclosure.
Under federal law, a creditor is required to file a 1099-C whenever it forgives a loan balance greater than $600. This may create a tax liability for the former property owner because it is considered "income." The Mortgage Forgiveness Debt Relief Act provides tax relief for some loans forgiven in 2007 through 2012.
Short Sale at a Glance
In a short sale, the lender agrees to allow the homeowner to sell the property for less than the balance of the loan. The homeowner’s liability for the deficiency balance is an open question. However, in HAFA, the servicer is prohibited from collecting on a deficiency balance. Unlike a deed in lieu of foreclosure, the ownership of the property is not transferred to the mortgage holder, and remains with the owner until the sale closing.
Some lenders choose short sales (as opposed to deeds in lieu of foreclosure) because they do not want to own the distressed property. They would much rather see the owner, who is motivated to sell the property quickly, handle the details of the sale. Also, lenders make money from lending money and are not well equipped to manage properties.
Whether the servicer picks a deed in lieu of foreclosure or a short sale depends on how the lender balances its risks and how it wants the distressed properties to appear on their books. Local laws may have an impact on the decision, too.
Regarding the homeowner’s credit report, Bills.com readers have reported that short sales have either no or a slightly negative impact on the consumer’s credit score. Fair Isaac & Co., however, reports short sales have a severe negative impact on a homeowners credit score. This is in contrast to a foreclosure, which will have a significant impact on a credit score. If you are facing foreclosure and are given the option of a short sale or deed in lieu of foreclosure, do it! The slight impact a short sale may have on a credit score is no reason to avoid a short sale.
In 2009, the Obama Administration created the Making Home Affordable (MHA) program. A 17-page document titled Modification Program Guidelines outlines the 2009 provisions for trial loan modifications. An eligibility MHA questionnaire helps homeowners determine if they may qualify. This program has two components: 1) mortgage refinancing through Home Affordable Refinance Program (HARP); and 2) mortgage modification through Home Affordable Modification Program (HAMP). There are provisions that also include homeowners with second mortgages (liens) or even third mortgages. HAMP Borrower FAQs and HAMP Factsheet answer basic questions on the program. The Making Home Affordable Program Web site provides eligibility information, how to request a modification, and additional facts.
The HAMP overview page describes succinctly the requirements that borrowers must meet to be eligible. In a nutshell, HAMP is designed to help homeowners and servicers avoid foreclosure by modifying the terms of the loan to make the mortgage payments affordable for the long-term.
The HAMP qualifying criteria include:
- Borrower is delinquent on their mortgage or faces imminent risk of default
- Property is occupied as borrower's primary residence
- Mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.
HAFA alternatives are available to all HAMP-eligible borrowers who:
- Do not qualify for a Trial Period Plan
- Do not successfully complete a Trial Period Plan
- Miss at least two consecutive payment during a HAMP modification; or
- Request a short sale or deed-in-lieu.
HAFA is complex with numerous guidelines set by the Treasury Dept. These new guidelines do not apply to loans by Fannie Mae, Freddie Mac, FHA or VA because these programs have their own short-sale programs that vary from HAFA.
HAFA provides incentives to mortgage lenders (servicers), seller, and other lien holders. There are deadlines that the mortgage lender and subsequent lien holder have to follow to provide timely progression on the sale of the property. HAFA simplifies and streamlines the short sale and deed in lieu process by providing a standard process flow, minimum performance timeframes, and standard documentation.
A HAFA overview provides a description of the current guidelines plus has the latest documents borrowers need for the short sale or deed-in-lieu of foreclosure. A 45-page HAFA Supplemental Directive 09-09: Home Affordable Foreclosure Alternatives – Short Sale and Deed-in-Lieu of Foreclosure Update provides detailed information.
As mentioned, servicers need not participate in MHA, HAMP, or HAFA, though most do. However, the reality of the deadlines depends on the rigorousness of the servicer to implement the provisions.
The Treasury Dept. picked Freddie Mac to serve as the compliance agent and Fannie Mae as program administrator. The guidelines for payments is still under development by Fannie Mae as this was written.
Regarding credit reports, the servicer still may report to the consumer credit reporting agencies (i.e., Equifax, Experian, and TransUnion) the account as "full file" status. The 45-page document mentioned above contains further details on the credit reporting.
HAFA for existing borrowers (sellers)
Homeowners selling their homes with a deed in lieu of foreclosure or short sale will benefit from a more streamlined process that includes deadlines the servicers must follow, and a $3,000 payment to cover relocation expenses. Also, borrowers must receive disclosures of costs and net proceeds the servicer requires. The HAFA eligibility requirements are the same as the original HAMP.
The bank or financial institution servicing the mortgage (called a "servicer") must respond to a reasonable offer within 10 business days of receipt of all the required documents including the signed purchase offer and Request to Approve a Short-Sale (RASS). The servicer still has the option to reject the offer. However, this timeline will improve the chances of the borrower and purchaser to finalize the sale quickly.
Closing will occur in no less than 45 days, unless all parties agree to a shorter timeline. The most important provision for the borrower is that if the servicer participates in the HAFA program, and the first and second lien holders accept the incentives, then there can be no deficiency judgment. As with any other debt forgiveness, the servicer will issue any deficiency on IRS Form 1099C and may be taxed as income. As mentioned previously, see the Bills.com resource Mortgage Forgiveness Debt Relief Act to learn how to avoid taxes on forgiven mortgage debt.
HAFA for purchasers (buyers)
Read the supplement directive mentioned above for the program terms and conditions for purchaser obligations.
For example, the sale and purchase must be an "arms-length" transaction, which means that the buyer and seller must not be related by marriage, family, or commercial enterprise. The buyer also agrees not to sell the property for 90 days after closing. The 10-day time period is a great improvement because it has been common for purchasers to wait months for servicers to review offers.
Review the current Making Home Affordable press releases when considering the sale or purchase a property subject to HAFA to see if any recent changes to HAMP or HAFA effect you. The official Making Home Affordable and HAMP Web sites also provide current and creditable information.
In sum, servicers are required to respond to offers within 10 business days of receiving all of the buyer's documents and provide specific reasons for denying the offer if it is rejected. This provides the buyer a relatively quick response to offers, and the ability to attempt to negotiate with the servicer. Also, the seller will receive $3,000 to relocate, which will make it possible for financially distressed homeowners to afford replacement housing.
If you have questions about the documents you are signing and what the consequences may be, consult with an attorney in your state who has experience in real property.
I hope this information helps you Find. Learn & Save.