Not all distressed borrowers can save their homes. As mortgage relief triage, the Obama Administration has emphasized loan modification and refinance , yet the effort is falling far short of the 9 million at risk homeowners that the administration set out to help. More than five million borrowers are currently behind on their mortgages.
One of the biggest factors that leads to mortgage default is when a homeowner owes more in a mortgage on his residence than it is worth, being underwater with a loan. According to First American CoreLogic, by the end of 2009, nearly one in four mortgagors were underwater with their home loans. Many of these homeowners are not eager to keep throwing good money after bad.
As of April 5th, the Obama Administration is adding a new option to its efforts, Home Affordable Foreclosure Alternatives, HAFA, to allow borrowers to avoid foreclosure through a short sale or a deed-in-lieu of foreclosure option. With a short sale, the mortgage servicer lets the borrower sell the property for less than the outstanding mortgage. In a deed-in-lieu transaction, the borrower relinquishes the deed on the property in exchange for a release on the outstanding loan obligation. In these cases, the lender allows the borrower to walk away from the property without a cash contribution or promissory note. The lender also agrees not to pursue a deficiency judgment against the borrower. Both sides avoid the expense and trauma of a foreclosure.
The HAFA program provides financial incentives when a short sale or dead in lieu are finished, i.e.
- $1500 in relocation assistance to the distressed homeowner
- $1000 in reimbursement to the mortgage servicer
- $1000 for release of a second mortgage with a total of up to $3,000 in short sale proceeds to be distributed to those who hold subordinate liens.
The program will be made available to borrowers who meet HAMP loan modification requirements but can not successfully complete a trial loan modification. HAFA is designed to streamline the process by using standardized paperwork while drawing on the information collected by HAMP. HAFA will allow borrowers to get pre approval for a short sale before listing a property and prohibits lenders from seeking a reduction in the real estate sales commission.
Much of the recent slowing in foreclosures has been blamed on lenders being hesitant in flooding the market with depressed properties. Although HAFA is considered a positive move by many, it could paradoxically lower real estate values, by streamlining property liquidation moving bank owned homes on the market sooner than they are now. The HAFA program is due to end the last day of 2012.