Just on November 30th, 2009, the Treasury Dept. released the forms and guidelines for the new Home Affordable Foreclosure Althernatives Program (HAFA). This program is expected to be a huge leap forward to help homeowners who are unable to retain their home under the Home Affordable Program (HAMP).

HAFA was created to streamline and simplify the use of short sales and deeds-in-liu of foreclosure by tweaking the process that the banks currently employ.

Just to highlight HAFA...

- It is designed to complement HAMP by providing althernatives for homeowners who qualify for HAMP, but are still unable to keep their home. Why is this important? Well, almost 65% of the loan modifications completed in 2009 under HAMP ended up back in foreclosure within 6 months.

- The banks will use the same financial and hardship information that was collected during the loan modification application process under HAMP. This is HUGE. At present, every homeowner I work with on a short sale has to resubmit the entire hardship package as if the bank was reviewing them for the first time.

- The lenders participating in HAMP will allow homeowners to receive preapproved short sale terms BEFORE listing the property to include the miniumum acceptable net proceeds. Wow! What a far cry from today's short sale process where we must list the property, find a buyer, and then wait and wait and wait while the bank reviews the file.

- The biggest benefit is that the banks will be required to fully release the homeowner from future deficiency judgements, AND of the 2nd lienholder receives an incentive under HAFA, that debt as well. This means if the 2nd can't receive a cash contribution, a promissory note or a deficiency judgement.

So the major banks are finally being forced to standardize their processes, documents and timeframes/deadlines for processing short sales. It's a very complex program, and you are welcome to read the full HAFA Bulletin here.

Who is Eligible for HAFA?
Basic eligibility for a homeowner includes criteria for HAMP:

1. The property must be a principle residence.
2. The first lien was originate prior to January, 2009.
3. The mortgage must be delinquent or is reasonable foreseeable.
4. The principal balance of the unpaid loan can be no more than $729,750 (slightly higher limits for 2-4 unit properties).
5. The borrower's total monthlly payment for principal and interest exceeds 31% of gross income.

How this program will be implemented will be that the loan servicer will send a short sale agreement (SSA) to the homeowner after determining the borrower is interested in a short sale and they and the property qualify. The agreement will explain how the program works and specific conditions of the particular lender.
The next step for the homeowner is to hire a real estate agent with short sale expertise to list the property and the borrower/homeowner submits a "request for approval of short sale" (RASS) to the loan servicer within three days for approval.

How are the banks going to evaluate a loan to see if it is a candidate for HAFA? If a loan is in default, the homeowner will receive a solicitation and need to respond. Then the bank will assess the financial viability, that is, whether it makes better sense to do the short sale or if foreclosure will yield a greater return. Since the homeowner will have previously applied for a loan modification under HAMP, the bank will then use the same financial information to determine hardship. Then the property will get appraised, and the title search will be completed. Ultimately the homeowner will get notice if they short sale is or is not available.

Other important points
- The deal needs to be an "arms length" transaction, meaning the homeowner cannot sell the property to a relative or anyone else with whom they have a close personal or business relationship.
- It's possible that the debt forgiven could be treated as income for tax purposes. This matter needs to be reviewed with a tax advisor since it will not be taxed if the amount doesn't exceed the debt that was used to aquire, construct, or rehab a principle residence.
- The lender will report to the credit bureaus that the mortgage was settled for less than full payment. This may hurt a credit score, but I know of the best credit repair company in the business that can get this fixed quickly.
- The new buyer cannot resell the property for 90 days.

You can find more articles about Los Angeles Short Sales here.

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