So What’s Up With HAFA?
So with all this HAFA hoopla what is the skinny on this program? What are positives and the negatives? Let’s delve into the particulars.
What is HAFA?
HAFA stands for Home Affordable Foreclosure Alternative and is a subset of the HAMP program rolled out last year.
So what’s the deal, how does it work?
HAFA is supposed to “streamline” the short sale process by standardizing paperwork across lenders and shortening the approval timelines for a short sale. Notice I said “Supposed to”.
HAFA has incentives for the Servicers, Investors and Borrowers to participate. The Servicers get paid to complete HAFA short sales, the Investors get paid for approving them and the Borrowers get $3,000 at closing for preventing them all from further losses associated with foreclosure.
All sounds good right? Well not quite so good.
First off HAFA has actually slowed down the entire short sale pipeline across almost all lenders. Citimortgage discloses that HAFA adds about 4 weeks to a short sale. Bank of America is 2 weeks to forever longer.(These are if not pre-applying)
The reason for the increased timelines is that HAFA allows the borrower to “pre-apply” for a HAFA short sale. In theory that is great. The borrower can find out if they qualify for a short sale and the bank will tell them how much they will accept. Also, During the minimum 120 marketing period the bank will not foreclose. Sounds Good!
But it isn’t, for many reasons. For the system in general, the negative is that there are now tens of thousands of short sales being reviewed that don’t even have offers on them. This is overwhelming the servicers and making all short sales take longer.
But that is just one negative. Lets look at the pros and cons of the 2 ways to get a HAFA short sale done.
If you pre-apply for a HAFA short sale, before there is an offer, the servicer will;
a.Review the sellers financials to determine if they qualify.
b.Order a value and determine how much they are willing to accept for the property. This can be in the form of a “net to the bank” or an “approved listing price”
c.Issue the Short Sale Agreement (SSA) for the seller and their agent to sign. This agreement sets the terms of the HAFA program such as;
1.Length of marketing period, not to be less than 120 days
2.Commission approved, can be less than listing agreement and can be less than 6%, Except Fannie and Freddie loans
3.Amount of mortgage payment that must be made during the marketing period, not to exceed 31% of the borrowers GROSS monthly income
4.Deed-In-Lieu language. This can state that if the borrower does not find a buyer with an offer acceptable by the lender, that at the end of the marketing period the borrower will deed the property back to the bank in a voluntary foreclosure.OUCH!
5.That the borrower will receive a full release of liability for the remaining balance at the closing of a Short Sale or Deed-In-Lieu
6.That the borrower will receive $3,000 at closing of the Short Sale or Deed-In-Lieu
1.Seller gets full release of liability
2.Seller gets $3,000 at closing
3.Saves time after the SSA is agreed to as the servicer only has to review an offer against the pre-determined approved price.
1.Commission can be arbitrarily cut below 6%, accept for Fannie and Freddie loans
2.Seller may be required to make a mortgage payment they cannot afford, to qualify for HAFA
3.Seller may have to sign agreement to a Deed-In-Lieu if a buyer cannot be found at the banks approved price. This is at the beginning of the marketing period.
4.When the BPO is done, there has been limited or no listing history or showing feedback to help determine what the market is NOT willing to pay for the property and no offer to be considered to represent what a buyer from the market IS willing to pay for the property. This can increase the possibility of the value coming in at a price that the market is not willing to pay and dooming your short sale to failure from the start.
2.Apply for HAFA when you have an offer
If you apply for HAFA short sale, when submitting an offer, the servicer will;
a.Review the sellers financials to determine if they qualify.
b.Order a value and determine how much they are willing to accept for the property.
c.Review the offer for approval based on the investors guidelines and BPO value.
Pros
1.Seller gets full release of liability
2.Seller gets $3,000 at closing
3.Commission cannot be cut below what is agreed to in the listing agreement, not to exceed 6%
4.The BPO agent will have your full marketing history, showing feedback and the offer to consider along with comps when conducting the value estimate. This reduces the possibility of an inflated value.(but doesn’t eliminate it)
Cons
1.The process will be longer for the buyer as the bank has not already determined if the borrower qualifies or what their opinion of value is on the property
2.Freddie Mac does not allow for HAFA applications other than the pre-application process. So it is important to pre-apply for HAFA if the loan is owned by Freddie Mac
3.Foreclosure is not avoided while marketing the property. Care should be taken to be sure a foreclosure date is not immanent and pre-apply if it is to buy the seller time.
My Conclusion
In most cases it is advisable to not pre-apply for HAFA in order to avoid the possibility of an inflated BPO, un-affordable mortgage payment for the seller, Possible Deed-in-Lieu language in the SSA, and commission cuts. Oh, did I mention that during the marketing period you as the agent have to continue to report back to the bank with monthly CMA’s and other reports?
In most cases applying once an offer is received is your best shot at avoiding negatives for your seller and yourself and also giving yourself the best shot at actually getting the short sale approved. But as in all short sales, the buyer expectation on time-frame are crucial.
All that being said…It is the sellers decision on how to proceed and they should be fully informed of the pros and cons of both courses before making that decision. After that, it is up to all of us to do our best to navigate the pot holes and avoid the negatives whenever possible.