Short Sales in Texas

HAFA Changes | Supplemental Directive 10-18 | December 28, 2010

Supplemental Directive 10-18 December 28, 2010
Home Affordable Foreclosure Alternatives Program – Policy Update

In February 2009, the Obama Administration introduced the Making Home Affordable (MHA) Program to stabilize the housing market and help struggling homeowners get relief and avoid foreclosure. In March 2009, the Treasury Department (Treasury) issued uniform guidance for loan modifications by participants in MHA across the mortgage industry and subsequently updated and expanded that guidance to include the Home Affordable Foreclosure Alternatives Program (HAFA) to provide borrowers with an alternative to foreclosure through a short sale or deed-in-lieu (DIL) of foreclosure when a loan modification is not available. In December 2010, Treasury issued version 3.0 of the Making Home Affordable Program Handbook for Servicers of Non-GSE Mortgages (Handbook), a consolidated resource for guidance related to the MHA Program for mortgage loans that are not owned or guaranteed by Fannie Mae and Freddie Mac (Non-GSE Mortgages).

This Supplemental Directive provides policy enhancements to HAFA and amends and supersedes the notated portions of the Handbook. This Supplemental Directive is effective February 1, 2011; however, servicers may begin to implement the changes outlined in this Supplemental Directive immediately. By February 1, 2011, servicers must make appropriate updates, consistent with investor guidelines, describing the basis on which the servicer will offer HAFA to borrowers (HAFA Policy) and ensure that all potentially eligible borrowers are evaluated and treated consistently.

Servicers that have executed a servicer participation agreement and related documents (SPA) must follow the guidance set forth in this Supplemental Directive. This guidance does not apply to first lien mortgage loans that are owned or guaranteed by Fannie Mae or Freddie Mac, or insured or guaranteed by a federal agency, such as the Federal Housing Administration, Veterans Administration or the Department of Agriculture’s Rural Housing Service.

This Supplemental Directive covers the following topics:

• Monthly Gross Income

• Vacant Property

• Release of Subordinate Liens

• Timing for Issuance of Short Sale Agreement

• Timing for Response to Alternative Request for Approval of Short Sale

• Real Estate Brokerage Commissions

• Alternative Deed-in-Lieu Programs

• Borrower Notices

• Retroactivity

• Reporting

• Compliance

• Monthly Gross Income

With respect to HAFA eligibility, servicers are no longer required to verify a borrower’s financial information or to determine if the borrower’s total monthly mortgage payment (as defined in Section 6.1.2 of Chapter II of the Handbook) exceeds 31 percent of the borrower’s monthly gross income as currently set forth in Section 2 of Chapter IV of the Handbook. Servicers must continue to verify the borrower’s hardship by obtaining a signed Hardship Affidavit or Request for Modification and Affidavit (RMA). Notwithstanding the foregoing, each servicer may include a requirement in its HAFA Policy that borrowers provide updated financial information to evaluate the borrower.

Vacant Property
To be considered for HAFA, the property currently must be or recently must have been the borrower’s principal residence. A property that has been vacant or rented to a non-borrower for not more than 12 months prior to the date of the Short Sale Agreement (SSA), Alternative Request for Approval of Short Sale (Alternative RASS) or DIL agreement (DIL Agreement) is eligible for HAFA, so long as the borrower provides documentation that the property was such borrower’s principal residence prior to relocation and such borrower has not purchased a one- to four-unit property during the 12-month period prior to the date of the SSA, Alternative RASS or DIL Agreement. The borrower’s reason for relocation does not need to be connected to re-employment or transfer of employment. Also, there is no longer a minimum distance requirement. Servicers are not required to verify the number of miles the borrower moved from the property.

Release of Subordinate Liens
Subordinate mortgage/lien holders will continue to be paid in order of priority as set forth in Section 6.2.4.2 of Chapter IV of the Handbook. However, servicers are no longer limited by the six percent cap with respect to payments to each subordinate mortgage/lien holder. The servicer, on behalf of the investor, shall determine the amount or percentage of the unpaid principal balance of the lien that will be paid to each subordinate mortgage/lien holder until the $6,000 aggregate cap is reached. Each servicer must include in its HAFA Policy how subordinate mortgage/lien holders will be paid. Investors continue to be eligible for incentive reimbursement for up to one-third of the cost to extinguish subordinate liens as described in Section 12.3 of Chapter IV of the Handbook.

Timing for Issuance of Short Sale Agreement
The servicer must complete and send to the borrower an SSA no later than 30 calendar days from the date the borrower responds to the servicer’s HAFA solicitation as set forth in Section 4 of Chapter IV of the Handbook. If an unsolicited borrower requests consideration under HAFA, the servicer must evaluate the borrower’s eligibility and, if eligible, complete and send the borrower an SSA no later than 30 calendar days from the date of the borrower’s request.

Timing for Response to Alternative Request for Approval of Short Sale
No later than 30 calendar days from the date of receipt from the borrower of an executed sales contract, Alternative RASS, and a signed Hardship Affidavit or RMA, the servicer must communicate approval or disapproval of the sale or provide a counter offer on the Alternative RASS.

Real Estate Brokerage Commissions
With respect to SSA transactions, the real estate commission that may be paid shall be the amount indicated in the listing agreement between the borrower and the listing broker, provided that such commission shall not exceed six percent of the contract sales price. When the servicer has retained a contractor to assist the listing broker with the transaction, the servicer must include a statement in the SSA that any associated vendor fees will not be charged to the borrower or deducted from the real estate commission.

With respect to Alternative RASS transactions, when the servicer has retained a contractor to assist the listing broker with completion of the transaction, the servicer must include a statement in the Alternative RASS form that any associated vendor fees will not be charged to the borrower or deducted from the real estate commission.

The model RASS and Alternative RASS forms have been updated to reflect these changes and are available on www.HMPadmin.com.

Alternative Deed-in-Lieu Programs
DIL Agreements between servicers and borrowers that provide an option for the borrower to continue to occupy the property on a rental basis (deed-for-lease) or provide an opportunity for the borrower to repurchase the property at some future time are also eligible for financial incentives under HAFA, so long as all other program requirements are met. At the discretion of the servicer in accordance with investor guidelines, the borrower relocation incentive may be paid either upon the successful closing of the DIL or at a future time when the borrower vacates or repurchases the property. Servicers offering programs of this type must include program descriptions and conditions in their HAFA Policy.

Conditional DIL agreements that allow a borrower to reinstate the original loan following some period of rental occupancy are not eligible for HAFA incentives unless and until the DIL is final and the borrower no longer has the option of reinstating or modifying the original first mortgage lien.
Borrower Notices

Under Chapter 4 of Section IV of the Handbook, when a borrower who was not previously evaluated for HAMP requests a short sale or DIL, and the servicer determines that the borrower meets the HAMP eligibility requirements and will be solicited for HAFA, the servicer must notify the borrower verbally or in writing of the availability of HAMP and allow the borrower 14
calendar days from the date of the notification to contact the servicer by verbal or written communication and request consideration for HAMP. This Supplemental Directive clarifies that this notification may be given simultaneously with the servicer’s consideration of the borrower for HAFA.

Retroactivity
Servicers are not required to implement the terms of this Supplemental Directive as to any loan that has been reported via the HAMP Reporting Tool or for any loan as to which a borrower has been determined to be ineligible for HAFA. Notwithstanding the foregoing, servicers may re-evaluate borrowers previously determined to be ineligible for HAFA using the guidance in this Supplemental Directive. Each servicer’s HAFA Policy must contain a written policy that describes the basis on which the servicer will re-evaluate such borrowers under HAFA.

Reporting
Under HAFA, servicers are required to provide periodic loan level data to the Program Administrator. Updated HAFA reporting and payment processes implementing the terms of this Supplemental Directive are currently under development by the Program Administrator. Subsequent guidance on such processes will be provided on www.HMPadmin.com. Servicers of loans with SSAs or DIL Agreements entered into under HAFA after the date of this Supplemental Directive will not be required to report updated HAFA data using the HAMP Reporting Tool until the reporting processes are in place, but in this interim period servicers must collect and store information on all such HAFA transactions so that the necessary data can be reported when the updated processes become available. The policy guidance set forth in this Supplemental Directive will not require the collection of any additional data beyond the data servicers were required to collect prior to the issuance of this Supplemental Directive. When the updated reporting processes become available, servicers will be provided instruction on how to report the "Front Ratio before Modification” (DD77 in the HAFA Data Dictionary) and potentially other existing fields affected by this Supplemental Directive. Finally, HAFA incentives for such loans will not be paid until the updated reporting and payment processes through the HAMP Reporting Tool are in place; borrowers, servicers and investors will be reimbursed for all incentives relating to such HAFA transactions closed prior to the updated reporting and payment processes becoming available.

Compliance
In addition to the requirements of Section 2.2.3 of Chapter I of the Handbook, servicers are required to retain all documents and information received during the process of determining borrower eligibility, including evidence of receipt of required documents such as the Hardship Affidavit or RMA, RASS or Alternative RASS, as well as the evidence used to determine if the property was vacant. Servicers are also required to retain all documents and information related to the terms of the SSA or approval of the Alternative RASS.

Texas Short Sales | 3 Most Aggravating Parts for a Listing Agent

1) A lender that does not care and shows it by not returning phone calls or emails, and lets a property to go into foreclosure due to their lack of responsiveness;

2) Uneducated real estate agents that perform BPO's for lenders.  The majority of these agents have no real experience in pricing distressed properties, yet the lenders are relying on the agent's valuation as if it was gospel.  To be a BPO agent, you do not need any formal training (other than a real estate license) and they are paid in the range of $40 to $65 to perform this extremely critical service); and

3) Buyer Agents that have no clue as to what they are doing when it comes to being involved in a short sale transaction. 

Now that I have ranted, I feel better...thanks for listening.  Yes, it has been one of those weeks...and it's only Monday!   :-)

HAFA Provisions

• Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.
• Uses borrower financial and hardship information already collected in connection with consideration of a loan modification.
• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• Uses standard processes, documents, and timeframes/deadlines.
• Provides the following financial incentives:
  • $3,000 for borrower relocation assistance;
  • $1,500 for servicers to cover administrative and processing costs;
  • Up to $2,000 for investors who allow a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders, on a one-for-three matching basis.
• Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.

Why is a Texas Short Sale Better Than a Texas Foreclosure?

When foreclosure occurs, a homeowner is forced to vacate the property and may encounter legal issues and costly fees involved with the foreclosure process. This is undesirable for both the homeowner and the lender.

In a short sale, a homeowner enters into a mutual agreement with the lender to end the mortgage. This is reflected on your credit report as “negotiated settlement of debt,” which may be less damaging to your credit than foreclosure.

For more information on the credit or tax implications of pursing a short sale to avoid foreclosure, we suggest you consult with your broker, accountant or other professional adviser.

What is a Deficiency Judgment?

A deficiency judgment is a judgment lien against a debtor, defendant or borrower whose Texas foreclosure sale did not produce sufficient funds to pay the mortgage in full. This option may or may not be available to the lender, depending on whether they have made a recourse or non recourse loan.

The fuller, statutory definition is: "the whole residue, or so much thereof as the court may determine to be just and equitable, of the debt remaining unsatisfied, after a sale of the mortgaged property and the application of the proceeds, pursuant to the directions contained in such judgment, the amount thereof to be determined by the court as herein provided.

The plaintiff's attorney (in other words, the bank's lawyer) must make a motion to receive such a deficiency judgment. Otherwise, the amount gained from the sale shall be deemed the full amount owed, and the plaintiff has no right to collect the additional debt. However, if the parties (mortgagor and mortgagee) have already agreed in their mortgage or promissory note, then the debtor could be liable for the full amount.

A debtor who has a deficiency judgment should see an attorney for possible remedies, including bankruptcy, an exemption from creditors,an appeal, or a motion. As with all legal research sources on-line, Internet users should take caution before applying such advice to your own case, and perhaps should consult an attorney.

Example: Upon Default by the Mortgagor a lender Forecloses on the mortgage. The unpaid balance of the loan is $102,000. The property is sold at public Auction and brings $80,000. The lender then seeks a deficiency judgment against the mortgagor to recover the $22,000 shortage, plus foreclosure expenses.

Deficiency States

Legislation enacted during the Depression still restricts the availability of deficiency judgments in several states. In some jurisdictions, deficiency judgments are prescribed in certain situations, while in other states, they are limited to the amount by which the debt exceeds the fair market value of the property. Waiver, the intentional relinquishment of a known right, of the benefits conferred by anti deficiency legislation contravenes public policy and is ineffective.

In non-deficiency states like Arizona a lender is unable to pursue any type of a deficiency judgment. Concerning foreclosures non-deficiency states are advantageous to owners in foreclosure because the lender is unable to pursue the deficiency judgment.

The good news is many lenders do not pursue deficiency judgments because someone that has lost a house to foreclosure is a poor candidate to collections on a deficiency judgment.

Communicating with the Loss Mitigation Negotiator

The stronger your relationship with the loss mitigator the better your chance of getting a short sale accepted. This is a people business and you will earn more paydays by increasing your communication skills.

The loss mitigator has an interesting job. They may be working 200-300 files at any given time so time is a very limited commodity.

Next, ask yourself what type of personality is likely to be a loss mitigator? Somebody that loves to talk and is very chatty? Somebody that is very empathetic and understanding? Not likely!

Most often a loss mitigator will be direct and to the point. But don't mistake the loss mitigator for somebody that's revealing all of their cards. Many are paid on commissions so they will play hardball in the negotiations as long as possible.

In the initial call with the loss mitigator I will be very pleasant and easy going. My goal is to establish rapport and find out their preferred way to communicate. I'll ask "Do you prefer to communicate by phone, fax or email?" All have their advantages and disadvantages.

Phone: Get their direct number and that of their supervisor in case they are out for any reason. The phone is very efficient if you can get through to the person directly without going through a prolonged messaging service and pushing 100 buttons.

FAX: Hands down the best way to communicate with loss mitigators. Lenders keep a log of faxes so be sure to log the number and time of your call. If faxing to a department fax expect 24-48 hours for a response. Always ask if the loss mitigator has a direct fax number. If so you are golden.

eMail: Personally this is my favorite way to communicate in the modern day world. Fast. Decisive. Available anytime. Some loss mitigators like to communicate through email and it can be very efficient. Always ask if the loss mitigator has an email address. However, do not rely on emails for short sale communications. 1) the email may not go through. 2) If the loss mitigator changes positions in the company the address could be terminated and you'll be left wondering what happened. Email are great... but if you use them be sure to also use the phone and fax so there are records of your communication.

Beware of Texas Foreclosure Rescue Scams

• Beware of anyone who asks you to pay a fee in exchange for a counseling service or modification of a delinquent loan.
• Scam artists often target homeowners who are struggling to meet their mortgage commitment or anxious to sell their homes. Recognize and avoid common scams.     
• Assistance from a HUD-approved housing counselor is FREE.
• Beware of people who pressure you to sign papers immediately, or who try to convince you that they can “save” your home if you sign or transfer over the deed to your house.
• Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
• Never make a mortgage payment to anyone other than your mortgage company without their approval.

Private Mortgage Insurance (PMI) and the Texas Short Sale

PMI is known as the acronym for private mortgage insurance.  Private Mortgage Insurance is used when a borrower has less than 20% for a down payment. Private mortgage insurance protects mortgage lenders against potential losses in the event of borrower default.  The insurance company, collects a monthly premium from the borrower (based on risk analysis) and agrees to pay the lender a certain amount of money if the loan defaults (usually 17-25% of the loan amount).  It's model was based on FHA loans and their mortgage insurance premium (called MIP, probably to confuse you).  FHA and VA offer guarantees to the lender equal to as much as 25% of the mortgage balance.

If a borrower defaults on his conventional mortgage (goes 90 days late on a payment), the lender files the state-specific foreclosure notice and sends in a claim to the insurance company to recover as much as 20% of the mortgage balance.  This, in turn, gives the lender a smaller risk when the lender sells the property to recover their losses.

Let's assume we have a $300,000 loan for a property that was purchased last year for $317,000.  It may be selling for as little as $260,000 today. Assume it costs about 9% to sell the property.   You should know two things:

How much will the lender receive from the insurance company if the borrower defaults? 

$300,000 times .20= $60,000

What price must the lender sell for to not have a loss?  

Well, the lender's exposure has been limited to $240,000 now that they received $60,000 from the mortgage insurance company.  We take $240,000 divided by 91% (remember that it costs 9% to sell so the 91% represents the net proceeds).       $240,000/.91= $263,736.

Why is this so important to Dallas Realtors?  When negotiating an offer for a property that would result in a short payoff to a lender, you need to remember this fact:  PMI claims will mitigate some of that loss.  If you know that a seller has PMI on their mortgage, you have that much more wiggle room when negotiating a short sale with the lender.  Lenders have been known to attack Realtor's commissions as much as 50% when a short sale exists.

Knowing your numbers and how PMI affects a lender will help you defend your commission. If you understand the net effect the sale will have on a lender, your short sales will go much more smoothly.

HAFA | Home Affordable Foreclosure Alternatives with Freddie Mac

As a component of the Making Home Affordable Program (MHA), the Home Affordable Foreclosure Alternatives (HAFA) initiative offers eligible borrowers who did not qualify for or complete a permanent modification under the Home Affordable Modification program (HAMP) or another home retention option to avoid foreclosure. HAFA solutions help stabilize communities by limiting foreclosures in surrounding neighborhoods and allow affected borrowers to transition into more affordable housing.

Program Eligibility

• The initiative strives to help borrowers who do not qualify for or complete a HAMP permanent modification, or other Freddie Mac foreclosure alternatives, transition into more affordable housing and avoid foreclosure.

• Servicers must proactively offer a HAFA Short Sale to eligible borrowers and use standard documents and tools.

• All potentially eligible borrowers must be considered for HAFA before the mortgage is referred to foreclosure or a pending foreclosure sale is conducted.

• Borrowers cannot make cash contributions or promissory note obligations to satisfy either the first lien or subordinate liens, and upon completion of the HAFA Short Sale or HAFA Deed-in-Lieu all mortgage debts are extinguished.

• Borrowers and Servicers may receive incentives for successfully closing a HAFA Short Sale or HAFA Deed-in-Lieu, subject to certain requirements.

• The initiative is mandatory August 1, 2010, for first-lien mortgages owned, guaranteed, or securitized by Freddie Mac that were originated on or before January 1, 2009, and it will expire December 31, 2012.

• Eligible properties are single-family 1-4 unit primary residences, including condos, Single-Family Seller/Servicer Guide (Guide)-eligible manufactured homes, and negotiated conforming jumbos.

• Servicers must verify that the borrower is occupying the property as a primary residence, and it is not abandoned, condemned, or vacant (without an applicable exception).

• Borrowers must meet the basic eligibility criteria for HAMP, but not qualify for or complete a HAMP modification or other Freddie Mac home retention solutions.

• Borrowers must be more than 60 days delinquent and have cash reserves less than the greater of $5,000 or three times their current monthly mortgage payment.

• Borrowers who may be in foreclosure, in pending litigation involving the mortgage, or who are in active bankruptcy may be eligible for this initiative.

• Borrowers must be able to convey a clear, marketable title to the mortgaged property.

Key Features

• The initiative strives to help borrowers who do not qualify for or complete a HAMP permanent modification, or other Freddie Mac foreclosure alternatives, transition into more affordable housing and avoid foreclosure.

• Servicers must proactively offer a HAFA Short Sale to eligible borrowers and use standard documents and tools.

• All potentially eligible borrowers must be considered for HAFA before the mortgage is referred to foreclosure or a pending foreclosure sale is conducted.

• Borrowers cannot make cash contributions or promissory note obligations to satisfy either the first lien or subordinate liens, and upon completion of the HAFA Short Sale or HAFA Deed-in-Lieu all mortgage debts are extinguished.

HAFA | Freddie Mac Mortgage and Borrower Eligibility

The following mortgages are eligible for HAFA:

• First-lien mortgages, owned, guaranteed, or securitized by Freddie Mac that were originated on or before January 1, 2009.
• Eligible properties are single-family 1-4 unit primary residences, including condos, Guide-eligible manufactured homes, and negotiated conforming jumbos.
• Mortgaged property is not abandoned, condemned, or vacant (without an applicable exception).

Borrowers may be eligible for this initiative if they meet the following requirements:

• Borrowers must be more than 60 days delinquent and have cash reserves less than the greater of $5,000 or three times their current monthly mortgage payment.
• Borrowers must have first been considered for a HAMP modification and then for other Freddie Mac home retention options under Guide Chapter B65, but was either ineligible, did not complete, or declined the modification.
• Borrowers may be in foreclosure, in pending litigation involving the mortgage, or in active bankruptcy.
• Borrowers must be able to convey a clear, marketable title to the mortgaged property.