Ethical Foreclosure

   November 30, 2009, it became public that the administration of Fannie Mae has more power than most people realized and will be the new guiding rules for Short Sales and Deed-in-Lieu's as of April 5, 2010 when the below described Supplemental Directive will become effective. The new Supplemental Directive by the Home Affordable Modification Program for Servicers (lenders) seems to attempt to flatten the playing field in loan modifications, short sales and deed-in-lieu's done by Fannie Mae or Freddie Mac. It provides a guidance to servicers for adoption and implementation of Home Affordable Foreclosure Alternatives (HAFA) for FIRST lien mortgage loans that are not owned by Fannie Mae or Freddie Mac.

   In March 2009, the Obama Administration published detailed program guidelines for the Making Home Affordable (MHA) Program. Mortgage servicers were authorized to begin modifications under the plan immediately. With the assistance of several government agencies, GSEs, and servicers - this effort involved the development and refinement of servicer guidelines, modification documents, and data collection and modeling tools. Key servicer documents and tools required to service Home Affordable Modification Program (HAMP) are stored and maintained on HMPadmin.com. The site provides general guidelines and overview documents available to the public as well as secure access to core tools and documents needed to complete the loan modification process. HMPadmin.com continues to evolve just like the Making Home Affordable Program (HAMP). As new program updates are announced, the servicer documents and tools required to administer those programs are developed and added to this site to allow for a one-stop experience for mortgage servicers.

Let's take a look at the official summary of this new "Guidance" manual for Short Sales.

Home Affordable Modification Program: Overview

   The Home Affordable Modification Program (HAMP) is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Borrower eligibility is based on meeting specific criteria including:

1) borrower is delinquent on their mortgage or faces imminent risk of default

2) property is occupied as borrower's primary residence


3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

After determining a borrower's eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower's total pretax monthly income:

• First, reduce the interest rate to as low as 2%,
• Next, if necessary, extend the loan term to 40 years,
• Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

BOTTOM LINE to the home owner
   Despite the fact that this LOOKS attractive, it actually HURTS the home buyer. Basically IF the bank is HAMP approved AND you are eligible for a HAFA program the distressed home owner does NOT get a bail out or relief.

When the HAMP isn't enough (short sale, deed-in-lieu)

   Home Affordable Foreclosure Alternatives Program (HAFA) is part of HAMP and
provides financial incentives to servicers and borrowers who utilize a short sale or a deed-in-lieu to avoid a foreclosure on an eligible loan under HAMP. Both of these foreclosure alternatives reduce the need for potentially lengthy and expensive foreclosure proceedings. The options help preserve the condition and value of the property by minimizing the time a property is vacant and subject to vandalism and deterioration. In addition, these options generally provide a substantially better outcome than a foreclosure sale for borrowers, investors and communities.

   The Supplemental Directive (09-09) provides guidance to servicers for adoption and implementation of HAFA for first lien mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac (Non-GSE Mortgages).

   In a short sale, the servicer allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the mortgage. The servicer accepts the short payoff in full satisfaction of the total amount due on the first mortgage.

   Servicers must evaluate a borrower for a HAMP modification prior to any consideration being given to HAFA options in accordance with the provisions of Supplemental Directive 09-01 and any supplemental HAMP guidance. What this basically means is you must meet certain guidelines and go through various steps to attempt a loan modification. If you are found to have the ability to stay in your home financially through a loan modification, the lender must attempt to do that, prior to taking the house back or allowing the home owner to go through a short sale.

   While this process is approaching a single stream of how to go through a loan modification or short sale process, it does place new time limitations on each party to preform. This has an inherit way of making the already stressed out home owner, who can't already meet their debt obligations and already suffering from emotional, mental and sometimes even physical trauma, to a new level of stress as they must reproduce all paperwork yet again do to a short sale. Our suggestion, KEEP COPIES of EVERYTHING requested by the bank in one folder during the HAMP process you may need it for the short sale process if you are unable to be granted a loan modification.

The Qualifications of a HAFA
In accordance with the provisions of Supplemental Directive 09-01, a loan meets the basic eligibility criteria if all of the following conditions are met:
  • The property is the borrower’s principal residence;
  • The mortgage loan is a first lien mortgage originated on or before January 1, 2009;
  • The mortgage is delinquent or default is reasonably foreseeable;
  • The current unpaid principal balance is equal to or less than $729,7501¹; and
  • The borrower’s total monthly mortgage payment (as defined in Supplemental Directive
09-01) exceeds 31 percent of the borrower’s gross income.
¹This amount refers to 1 unit properties. Higher amounts apply to 2 to 4 unit dwellings. See Supplemental Directive 09-01

Servicers must consider possible HAMP eligible borrowers for HAFA within 30 calendar days of the date the borrower:
  • Does not qualify for a Trial Period Plan;
  • Does not successfully complete a Trial Period Plan;
  • Is delinquent on a HAMP modification by missing at least two consecutive payments; or
  • Requests a short sale or Deed-in-Lieu(DIL).
The date and outcome of the HAFA consideration must be documented in the servicer’s file.

The Short Sale Agreement (SSA)

The HAFA short sale process employs standard form documents and defined performance time frames to facilitate clear communication between the parties to the listing and sale transaction. Servicers must adhere to the following guidelines in connection with the issuance of an SSA. So for those of you who might be at the Short Sale Process and have a lender adhering to these policies already, here is what the MINIMUM the SSA packet MUST include:

• A fixed termination date not less than 120 calendar days from the effective date of the SSA (“Effective Date”). The Effective Date must be stated in the SSA and is the date the SSA is mailed to the borrower. The term of the SSA may be extended at the discretion of the servicer up to a total term of 12 months, in accordance with the requirements of the investor.
• A requirement that the property be listed with a licensed real estate professional who is regularly doing business in the community where the property is located.
• Either a list price approved by the servicer or the acceptable sale proceeds, expressed as a net amount after subtracting allowable costs that the servicer will accept from the transaction.
• The amount of closing costs or other expenses the servicer will permit to be deducted from the gross sale proceeds expressed as a dollar amount, a percentage of the list price or a list by category of reasonable closing costs and other expenses that the servicer will permit to be deducted from the gross sale proceeds.
• The amount of the real estate commission that may be paid, not to exceed 6% of the contract sales price, and notification if any portion of the commission must be paid to a contractor of the servicer that has been retained to assist the listing broker with the transaction.
• A statement by the borrower authorizing the servicer to communicate the borrower’s personal financial information to other parties (including Treasury and its agents) as necessary to complete the transaction.
• Cancellation and contingency clauses that must be included in listing and sale agreements notifying prospective purchasers that the sale is subject to approval by the servicer and/or third parties. Notice that the sale must represent an arm’s length transaction and that the purchaser may not sell the property within 90 calendar days of closing, including certification language regarding the arm’s length transaction that must be included in the sales contract.
• An agreement that upon successful closing of a short sale acceptable to the servicer, the borrower will be released from all liability for repayment of the first mortgage debt.
• An agreement that upon successful closing of a short sale acceptable to the servicer the borrower will be entitled to a relocation incentive of $1,500, which will be deducted from the gross sale proceeds at closing.
• Notice that the servicer will allow a portion of gross sale proceeds to be paid to subordinate lien holders in exchange for release and full satisfaction of their liens.
• Notice that a short sale may have income tax consequences and/or may have a derogatory impact on the borrower’s credit score and a recommendation that the borrower seek professional advice regarding these matters.
• The amount of the monthly mortgage payment, if any, that the borrower will be required to pay during the term of the SSA, which amount must not exceed 31% of the borrower’s gross monthly income.
• An agreement that so long as the borrower performs in accordance with the terms of the SSA, the servicer will not complete a foreclosure sale.
• Terms under which the SSA can be terminated.

Borrower Obligations

The borrower must sign and return the SSA within 14 calendar days from its Effective Date along with a copy of the real estate broker listing agreement and information regarding any subordinate liens. In returning and signing the SSA the borrower agrees to:

• Provide all information and sign documents required to verify program eligibility.
• Cooperate with the listing broker to actively market the property and respond to servicer inquiries.
• Maintain the interior and exterior of the property in a manner that facilitates marketability.
• Work to clear any liens or other impediments to title that would prevent conveyance.
• Make the monthly payment stipulated in the SSA, if applicable.

Monitoring Marketing Activity / Cause for Termination

During the term of the SSA, the servicer may terminate the SSA before its expiration due to any of the following events:

• The borrower’s financial situation improves significantly, the borrower qualifies for a modification, or the borrower brings the account current or pays the mortgage in full.
• The borrower or the listing broker fails to act in good faith in listing, marketing and/or closing the sale, or otherwise fails to abide by the terms of the SSA.
• A significant change occurs to the property condition and/or value.
• There is evidence of fraud or misrepresentation.
• The borrower files for bankruptcy and the Bankruptcy Court declines to approve the SSA.
• Litigation is initiated or threatened that could affect title to the property or interfere with a valid conveyance.
• The borrower fails to make the monthly payment stipulated in the SSA, if applicable.

Request for Approval of Short Sale (RASS)

Within three business days following receipt of an executed purchase offer, the borrower or the listing broker must deliver to the servicer a completed RASS describing the terms of the sale transaction. With the RASS, the borrower must submit to the servicer:

• A copy of the executed sales contract and all addenda.
• Buyer’s documentation of funds or buyer’s pre-approval or commitment letter on letterhead from a lender.
• All information regarding the status of subordinate liens and/or negotiations with subordinate lien holders.

Approval or Disapproval of Sale

   Within ten business days of receipt of the RASS and all required attachments, the servicer must indicate its approval or disapproval of the proposed sale by signing the appropriate section of the RASS and mailing it to the borrower. The servicer may require that the sale closing take place within a reasonable period following acceptance of the RASS, but in no event may the servicer require that a transaction close in less than 45 calendar days from the date of the sales contract without the consent of the borrower.

There is an ALTERNATE Request for approval for a short sale, this involves the home owner's servicer to approve a short sale under HAFA before an SSA has been executed. However the servicer must still preform a basic eligibility of the borrower as outlined in the HAFA Consideration section of the Supplemental Directive 09-09. If the borrower is found to be eligible for a HAMP the servicer must notifiy the borrower either verbally or in written form and the borrower has 14 days to respond. If the borrower does not wish to be considered for the HAMP, then the loan is subject to the SSA. In addition to this all information from Supplemental Directive 09-06 must be collected.

THIS was a bunch of information, in our Next Article we will cover the Deed-in-Lieu of the Supplemental Directive 09-09