A Wolf in Sheep’s Clothing?
April 5th marked the start date for the newest government program designed to assist homeowners rid themselves of over leveraged homes through the short sale process. The government calls this program HAFA, or Home Affordability Foreclosure Alternative. This actually the third version of the HAFA program with updates designed to enhance the appeal to homeowners. If I were a homeowner, however, I would be sure to carefully read the letter that your lender sends you prior to signing up for the HAFA program. I have outlined the details of the letter below. I have also placed a link to the letter at the bottom of this post.
Let’s start with the responsibilities that you will have as a homeowner under the HAFA program. You first list your home with a Realtor. This Realtor can be of no relation to you and cannot have any business interest with you. It is what is called an Arms Length Transaction. Also, if you, the homeowner, are a Realtor and hope to list your property under this program, understand that you cannot receive a commission as a result of the sale of your home. The Realtor you work with lists the property at a sale price set by the Lender. The home must sell within 120 days, unless the lender deems that additional time is allowable, in which case you have a maximum of 360 days. Your other responsibilities while under the program are:
- You must make payments, due on the 1st of each month, that are a total of 31% of your gross monthly income for the length of the time you are in the program.
- Keep your house and property in good condition and make every effort to allow your Realtor access to show the property.
- Be able to provide clear title to the buyer of the home. If you have any additional mortgages or other liens tied to the title of the home then they have to be cleared from the title prior to closing. This means that you either have to pay them off in full or YOU have to negotiate the debt with the lender to get them to take a lesser amount as payment in full. Under this program, you must make sure other lien holders will agree not to pursue other legal action related to the pay off of their lien, such as a deficiency judgment. The HAFA program will pay up to 6% of the balance of each lien from the sale proceeds, but will only pay a maximum amount for all liens of $6000. For example, you have a second mortgage with Bank of America that is for $50000. You will have to convince the bank to release your liability on the mortgage for $3000 or less in order to provide clear title to the buyer.
- You are authorizing the sharing of personal financial information about your mortgage, credit history, subordinate liens, and plans for relocation with your broker and other third parties that could be involved in the transaction including employees of the United States Treasury and its financial agents, Fannie Mae and Freddie Mac.
The difference between the amount you owe on the mortgage and the sale price of the home will be reported to the IRS through a 1099C filing as a debt forgiveness. In some cases, debt forgiveness can be taxed as income. In addition, the program allows you to receive up to $3000 for relocation expenses. This may also be reported to the IRS as a 1099C. They will also report your mortgage as “settle for less than full amount”.
If the short sale is not approved or you receive no offers on the property, then, by signing up for the program, you agree to a “deed in lieu of foreclosure”. This is nothing more than a voluntary foreclosure and carries the same weight as a foreclosure. Even in the event of a deed in lieu of foreclosure, it is still your responsibility to provide a clear and marketable title to the lender.
You can download a copy of the letter that they send to homeowners who may be eligible for the program here. Tell me what you think of the program. A helping hand to the homeowner in trouble, or a wolf in sheep’s clothing?
