This week brings with it hope for existing homeowners who are struggling to avoid foreclosure due to a negative equity or “underwater” mortgage. On April 5th, the government’s new Home Affordable Foreclosure Alternatives (HAFA) program went into effect. This program provides real options for people who want to sell their home, but can’t, because they owe more than it is worth.
Recent statistics show that 29% of all currently mortgaged homes have negative equity. Not all of these borrowers are facing a job loss or other financial crisis that might result in their losing their home to foreclosure; many people who have been victims of the current recession are now facing such challenges. One of the biggest obstacles for these borrowers is the ability to consummate a “short sale”, a transaction in which their mortgage lender agrees to accept less than the current mortgage amount as payment in order for the home to be sold. While the cost of a lender foreclosing averages 18-22% of the property value, many lenders have been dragging their feet in approving short sales because of overwhelmed loss mitigation departments and policies that dictate an offer be in place before a short sale is considered. This often results in a process that takes months to consummate, frustrating sellers and turning off many potential buyers.
To take advantage of the new program, borrowers must be currently late or on the verge of delinquency and must demonstrate their financial hardship. The property must be the principal residence and the borrowers must also have attempted to modify their mortgage without success. Also, banks are required to take action on a short sale request within 30 days. Loans that are owned or guaranteed by Fannie Mae or Freddie Mac are not automatically included in the program, though they will likely follow suit in short order.
Borrowers will be entitled to receive up to $3,000 in relocaton asistance and lenders can receive a $1,500 servicing bonus upon successful completion of the short sale transaction. Also an option is a deed-in-lieu of foreclosure, where the borrower signs over the home directly to the bank.
The biggest incentive to borrowers in this program is the ability to avoid the long-term negative effects of having a foreclosure on their credit report, as a short sale or “deed in lieu” will not have as significant a lasting effect. Furthemore, lenders will be prohibited from pursuing any collections of deficiency balances from the borrower.
Borrowers looking to take advantage of this program should contact their existing mortgage lender directly and request information on the HAFA mortgage program. Additional details can be found here.
The Home Affordable Modification Program is an excellent program if you can get through the application! After taking days to read & understand how to fill out & quality for HAMP I was able to lower my interest rate to 2%. The application was so confusing because they want you to fail! Now that I understand how to qualify I was able to help my neighbors get approved usually in about 30 days!