HAFA Provides Foreclosure Alternatives

Like a stone thrown into a pond, the subprime mortgage crisis has caused ripples that have effected almost every sector of the U.S. economy. Many homeowners now owe more on their mortgage than their home is worth. As many as five million borrowers are delinquent on their mortgages. The one-two punch of declining home values and staggering unemployment has caused the foreclosure rate to skyrocket, further depressing home values and creating a vortex that threatens to suck down the inchoate economic recovery.

The Obama Administration has a plan to solve this problem. Starting in April, the government will begin the Home Affordable Foreclosure Alternatives (HAFA) program. The program will provide incentives to borrowers and lien-holders to encourage short sales and debt forgiveness so that the economy can fully recover.  HAFA will allow those who cannot keep their house under the Home Affordable Refinance Program (HAMP) to more easily pursue a short sale and avoid foreclosure.

A short sale is when a house which is underwater, and generally at risk of foreclosure, is sold for less than the remaining amount on its mortgage. The lender then forgives the remaining debt and the former homeowner can start anew.  Frequently this process is stymied by a second mortgage holder on a home. Rep. Barney Frank, Chairman of the House Financial Services Committee recently sent a letter to four of the largest American banks stating that “second-lien mortgages are now a principal obstacle to many modifications”, and that the problem “has reached a critical stage and requires immediate attention”. Frank also explained that many of the second liens have no real value, as the first liens are underwater, and the chances for any return on the second lien is negligible. The majority of second lien holders are banks.

There are two main reasons banks are reluctant to write off second mortgages.  The first is that writing them off en masse would be hugely detrimental to their capital and bottom line. The second is that while foreclosure eliminates the first lien on a home, the borrower may still be obligated to pay off the second mortgage debt. If the borrower is broke, banks usually do not bother to pursue the debt but they retain the option to do so.

Under HAFA, holders of second-lien mortgages would receive up to 3% of the unpaid loan balance, up to a maximum of $3,000, for giving up all claims in the event of a short sale. Additionally, the borrower would get $1500 for relocation assistance, and servicers would get $1000 to cover administrative and processing costs, and first lien holders would get $1000 for allowing $3000 in short sale proceeds to be paid to subordinate lien holders. These subordinate lien holders must agree not to pursue deficiency judgments. Borrowers would be fully released from future liability for mortgage debt.

There are several benefits to these short sales. The investors that own home loans generally get more money out of a short sale than in the case of foreclosure. Foreclosed houses are often in poor condition which hurts the value of the house as well as that of the surrounding properties. Borrowers who participate in a short sale have less damage to their credit rating than in a foreclosure and are relieved of their debt burden.  Lastly communities avoid the blight of foreclosed and abandoned homes.

A solution to the foreclosure problem would be a major step in the healing of our economy and helpful to all homeowners, underwater or not. For help with all your mortgage needs contact our experts at 877-868-2503.