Will Changes to HAFA Work?
The Home Affordable Foreclosure Alternatives, or HAFA, was launched in April 2010 to provide an incentive to servicers and investors to pursue alternatives to foreclosures in the form of pursuing short sales and deeds-in-lieu of foreclosure. The program was designed for homeowners who failed to meet the requirements of the Treasury’s Home Affordable Modification Program, or HAMP. Unfortunately, both HAMP and HAFA have failed miserably, prompting changes to HAFA to be made.
To make short sales a success, proactive outreach is critical according to panelists on a short sale and deed in lieu panel at the MBA’s National Servicing Conference & Expo. In the past, loan servicers were more reactive than proactive when it came to short sales, looking at potential short sales that were brought to them, but not pursuing them ahead of time.
Changes to HAFA
The Treasury Department took action in December eliminating some rules it said have held back short sales through the HAFA program. Here are, for example, some of the changes to HAFA:
- HAFA no longer asks for income verification, unless the borrower is less than 60 days overdue on the mortgage. This means that borrowers who previously were deemed ineligible because their income was too high, may now qualify for a HAFA short sale.
- HAFA no longer needs to determine if the borrower’s total monthly mortgage payment exceeds a 31% debt-to-income ratio.
The overall goals for these changes to HAFA are to be more ‘proactive’ with their customers, starting the short sales process earlier, and to quicken the short sales timeline. The incentive for borrowers to short sell their home can be challenging when it can take up to two years or more to complete a foreclosure. The ability to stay in the home without paying the mortgage may lessen the incentive to participate, panelists said.
Another one of the changes to HAFA is giving more control to the servicers on how to pay out subordinate liens. Mortgage insurance companies and other 2nd lien holders have been stubborn in discounting their notes and causing short sales to fail. Before, the second-lien investor had to agree to accept 6% of the unpaid principle balance owed to them, up to $6,000. But the new guidelines eliminate that 6% rule (though the $6,000 cap is still in effect). Now, servicers on behalf of the investors determine the amount or percentage of the unpaid principal balance of the second lien to be paid to each holder.
Servicers on the panel said they expect the changes in HAFA to encourage more participation in the program. Changes to HAFA are welcomed as to this point, although any government interference in the real estate market has been a disaster. The panel estimates that we should know by the end of the first quarter of 2011 if these changes to HAFA made any difference.
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