Proposed Short Sale Guidelines (HAFA) – Part 2
In Part 1, I addressed which properties qualify for the proposed program and how the bank handling the short sale will determine if the borrower (seller) is eligible. This post will deal with the process the banks will be required to go through once a contract is received on a property approved for a Short Sale.
Imposed Guidelines on Banks for Approving a Short Sale Transaction
1. Loan servicers must determine, with their investors, the minimum net proceeds that will be acceptable . They must determine this before the Short Sale is started. This amount is what the bank wants to walk away from the deal with.
2. The loan servicer and investors must also determine the amount of transaction costs they will allow. This includes paying for buyer closing costs, paying for HOA documents, and the cost to the seller for closing the transaction.
3. The servicer must provide the borrower with a Short Sale Agreement. The Short Sale Agreement outlines the roles of everyone in the transaction and key marketing terms. Some terms of the Short Sale Agreement include:
- Price
- Proceeds
- Duration of Listing – not to be less than 120 days
- Listing Agent must be regularly doing business in the community the property is located in
- Either the bank approved list price or the acceptable amount the bank is willing to net from the sale
- Closing Cost amount that will be allowed by the bank
- Commission to be paid to REALTORS(R) - not to exceed 6%. The REALTOR(R) may have to pay the bank contractor hired to facilitate the transaction for the bank out of their commission.
- Any cancellation or contingency clauses
- That the transaction must be arm’s-length. The property can also not be resold within 90 days
- The borrower is released from all liability of repayment of the 1st mortgage lien
- Borrower is entitled to a relocation incentive of $1500 – this is deducted from the gross sales proceeds
- Whether a portion of the gross sales proceeds are to be paid to subordinate lien holders in exchange for a release and full satisfaction on those liens
- Any income, tax, and credit consequences of the Short Sale
- Monthly mortgage payments during the short sale process will not exceed 31% of borrower’s gross monthly income
- Clause that if the borrower participates in the program, the bank will not foreclose during the duration of the program
- Any terms of termination
4. The borrower must submit a request for Short Sale approval within 3 days of ratifying a contract. The request must include: contract/ addenda, purchaser’s financial documentation, and status of subordinate liens and or negotiations with subordinate lien holders.
5. The loan servicer must indicate approval or disapproval of Short Sale within 10 business days.
6. The loan servicer can not require closing earlier than 45 days from date of sales contract without borrower consent.
If the Short Sale is successful the following financial incentives are granted:
- Borrower – $1500 relocation incentive
- Loan Servicer – $1000 short sale incentive
- Subordinate Lien Holder – up to $1000 for approving to take up to $3000 as payment in full and satisfaction of debt
In Part 3 of this series, I will point out the flaws of this document and it’s implementation, as I see it.
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Ms. Stelmok,
I stumbled across your blog and I appreciate the tongue-in-cheek style of your first post on this topic. Your mild cynicism no doubt serves you well.
I’ve been trying to better understand the likely impact of the HAFA program. After carefully dissecting an unrelated program from Treasury (PPIP), I’ve concluded that policy direction can be better inferred from careful analysis than reliance upon casual observation or Treasury’s public statements. In the case of PPIP, I concluded the program amounted to a stunning scheme to prop up asset prices at taxpayer expense (many subtle details; I won’t bore you).
My question on HAFA is this: can you infer the likely outcomes related to Minimum Net Proceed calculations (your point #1 above)? I’ve read the full document, which only generally references “investor”, as the other interested party. My question is fundamental to program intent and effect here: 1) do the note holders retain considerable freedom to protect themselves by establishing prices at their discretion; or 2) does HAFA in meaningful ways nudge them to set competitive prices. Even if there is no arm-twisting of private banks, etc., an important 3rd question I guess is whether the “investors” will typically be Fannie/Freddie? What I’m attempting to get at here, is whether this program is likely to be modest and have little impact, or if it might have a profound impact because it results in market clearing prices, possibly substantially below current market prices.
My understanding is that there are nearly 3/4 million homes in the HAMP pipeline now, most of them likely to be eligible for HAFA. With resets on ALT A, etc., ramping up, the deluge of supply could eventually be quite large.
With the Fannie/Freddie 3 yr unlimited loss coverage announced by Treasury on 12/24, the HAFA program could well represent a profound turning point in Treasury policy: from extend and pretend, and anything to avoid price discovery, to a mad rush to market clearing prices (in housing anyway, and at taxpayer expense; there are other reasons to wonder if Treasury is ready to embrace a further downturn in housing). If Fannie/Freddie are the “investors” for most homes under HAFA, it may be important to recognize their losses are guaranteed for the next 3 years. Should Treasury wish to transition to price discovery, I presume Fannie/Freddie could easily drive market pricing due to their larger volumes. At what point might the direction of pricing policy be known? Do you have thoughts on likely outcomes here?
Hopefully this inquiry makes sense. I would appreciate any information or insights you might be able to share.
Cheers,
Wade
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