Good News For Homeowner Short Sales In 2011

The Home Affordable Foreclosure Alternative Program (HAFA) has not met up to its expectations with regard to providing a viable alternative to a full blown foreclosure for distressed homeowners wanting to sell properties that are underwater rather than have a foreclosure on their record.

The HAFA program's intent from the inception was intended to allow a homeowner facing foreclosure to short sale the property and also provide the possibility of a stipend of money for relocation purposes, once the is was complete. It also provides for monetary incentives for the servicers to administer the program to help facilitate short sales.

Unfortunately, the program also created loopholes for servicers to take advantage of the guidelines to make them work primarily in favor of the the servicer, representing the investor, to the disadvantage of the homeower. Some of the loop holes in the orginal HAFA program that made for sometimes insurmountable obstacles are:

(a) the inordinate amount of time it takes for servicers to respond to a borrower when electing to short sale a property and the fact that approval or disapproval of short sales, commonly take 90 or more days. During this time, most buyers who have made an offer on the property are discouraged and lose interest and move on. Thus, the homeowner loses the short sale opportunity. This results in the homeowner often needlessly being forced in to foreclosure and thus defeating the intent and purpose of the HAFA program.

(b) HAFA presently has no guidelines addressing the practice of servicers to completely ignore the underlying property listing agreement between the homeowner as seller and the prospective buyer of the property. Servicers more often than not unilaterally dictate the amount of commission that will be paid to the listing real estate broker. Most listing contracts have a six percent (6%) commission set for payment to the listing real estate broker.

This commission is the thing that motivates the real estate broker to list the property and work very hard to accomplish a sale on a very difficult property. Arbitrarily reducing the commission by servicers because they must approve the sale, often occurs and this knowledge has discouraged the real estate industry from embracing the concept of short sales and thus affects the entire real estate industry in a significant way.

The two obstacles described above account for a significant failure of short sales that otherwise could be successful and benefit the servicer, the homeowner and the real estate industry, which desperately is trying to right itself.

Finally there are new HAFA guidelines proposed that will take place effective February 1, 2011 that removes the obstacles described above along with several others. Here are some of the most important changes that will become effective:

1. No more need to verify income. Only a hardship letter or request for modification via short sale is required.

2. The property being short sold can be vacant or rented out up to 12 months prior to requesting the short sale without regard to whether the borrower has lived in the property so long as it was the borrower's principle place of residence within last 12 months.

3. Servicers are no longer limited to the 6% cap on extinguishing second, third or other subordinated loans during the short sale process.

4. Servicers are required to respond within 30 days to a borrower's request for a short sale. Servicers are required to approve or disapprove an offer submitted by a buyer of the property within 30 days of receipt or alternatively to respond with a counteroffer within that 30 day period of time.

5. Servicers must honor the amount of commissions agreed to be paid to the listing real estate broker up to six percent (6%) if that is what is agreed to between the listing broker and the borrower. No offset is allowed by the servicer. This is huge toward getting the real estate sales industry to engage more actively in short sales.

While one should be optimistic and excited about these new guidelines, the reality is that many of the servicers will not take heed and will continue their ways in ignoring rules and regulations. Therefore, it will be necessary for all parties involved in these short sales to be diligent and hold the servicer's feet to the fire. The difference this time around is that the regulations specifically include language like "the servicer "must" or "shall" follow specific guidelines.These terms "must" and "shall", although small, make all the difference. The effect is that the guidelines now have muscle that the courts will ultimately enforce under federal regulations and this message is now loud and clear to the servicers.

Real estate brokers, homeowners and others who understand the power of this new "language" change and who let the servicers know that they know the significance will meet with substantial success in the future. Homeowners and persons representing them should keep a copy of the Supplemental HAFA regulations handy when communicating with lender servicer negotiators.