New rules end short sale guessing game

Beginning April 5 new guidelines will make buying distressed properties much easier. Simply put, if this was poker you’d now be able to see the other guy's hand.

The goal of the new rules is to reduce the foreclosure inventory by making it easier to have a short sale. To do this the government wants lenders to unravel the current short-sale process, deals that can take months to close if they close at all.

In the past foreclosures were not much of a problem for lenders because distressed properties could generally be re-sold for enough money to fully pay off both the mortgage debt and the lender's foreclosure costs.

This system worked well when foreclosures represented about 0.5 percent of all loans, but numbers have now overwhelmed the traditional foreclosure process. The Mortgage Bankers Association says at the end of 2009 the overall foreclosure level reached 4.98 percent — 10 times greater than traditional levels. To make matters worse, we have six states which represent more than 60 percent of all foreclosures nationwide according to RealtyTrac — California, Florida, Michigan, Illinois, Arizona and Texas.

Because of numbers and concentration, investors often face huge barriers when looking for distressed properties. On one hand many foreclosed homes are not actually on the market as lenders hang on, hoping for higher future prices. On the other, investors have been encouraged to make short sale offers but without any hint regarding what price might actually be acceptable to the lender, a blind bidding process that can drag on for months and sometimes never settle.


Under the government's newly minted Home Affordable Foreclosure Alternatives Program (HAFA), the process of buying short sales is about to get very much faster and easier.

What HAFA says is this: When a home is headed for foreclosure lenders must get an independent valuation, usually a broker's price opinion (BPO). The lender does not have to price the property at the estimated market value or offer a discount, however a sale price must be established and that price must be revealed to the property owner. If a buyer then matches or exceeds the stated sale price the lender must agree to a sale within 10 days.

“With the new HAFA plan the guessing game for short sale prices is gone and so are endless delays,” says James J. Saccacio, RealtyTrac's chief executive officer. “The new system should keep a lot of homes out of the foreclosure process, help lenders get realistic market prices and allow buyers to make logical and practical offers.”

Seller Requirements

HAFA is designed for borrowers who can't get a loan modification under the government's Making Home Affordable plan or who want out of their mortgage with a short sale or a deed in lieu of foreclosure. The catch is that not all properties or owners will qualify for help under HAFA.

* The property must be the borrower's principal residence and not investment real estate or a second home.

* The mortgage must be a first lien originated before January 2, 2009.

* The mortgage must be delinquent or default must be reasonably foreseeable.

* The unpaid principal balance must be not more than $729,750.

* The borrower's total monthly mortgage payment must exceed 31 percent of gross income.

Rules For Investors

Not only are there rules for distressed borrowers, there are also rules for would-be purchasers. Deals must be arm’s length transactions and — here's a biggie for some investors — the property cannot be re-sold within 90 calendar days of closing.

Follow The Money

What makes HAFA attractive for lenders is that they might get more through HAFA than with a sheriff's sale, especially in major foreclosure centers. If they get a bid they'll at least obtain the price they set. Also, if they get a bid they'll have 10 days to find a better bid. The good news for lenders, buyers and owners is that 10 days after a qualifying bid is received the deal is done and the property will be sold.

In addition, financial incentives are built into the HAFA plan. There's $1,500 for borrowers at closing, something which may help them move or make an initial rental payment. There's $1,000 for servicers to help them off-set processing costs.

How second lien holders will be treated is fuzzy. The HAFA rules say 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” — but the exact proportion is a matter of negotiation and no doubt in some cases negotiation won't be possible.

Subordinate lien holders — say folks holding the second loan from a home purchased with piggyback financing — can get up to $3,000 from first lenders, and lenders can get up to $1,000 from the government to offset such payments. Whether $3,000 will be enough to get second loan owners to give up their claims is unknown, but $3,000 may be a lot better than a foreclosure where second lien holders get nothing.

In addition to the $1,500 at closing, the government says that under HAFA rules “the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower.” Translation: Deficiency judgments won't be an issue with HAFA deals, an advantage for distressed homeowners in the states which now all such awards.

Many loan owners will dislike the HAFA rules because by delaying the sale of distressed properties they've been able to hide losses. Now distressed property sales will be faster, meaning that lender books will show losses more quickly.

It's likely that the new HAFA rules will evolve into a lending standard for virtually all properties. The reason? Lenders and servicers won't want to spend time or money figuring out which properties qualify under HAFA and which don't. It will be easier to just throw them all into one HAFA-friendly process.

For specifics — and to see sample sale documents — go to


Peter G. Miller is syndicated to more than 100 newspapers and operates the consumer real estate site,