Today HAFA, also known as the Home Affordable Foreclosure Alternatives starts to work. What will it mean for troubled homeowners? For a start the program increases Treasury’s contribution to homeowners from $1,500 to $3,000, while the contribution for junior lien holders gets a rise from $3,000 to $6,000.
Why is Treasury looking for different ways to give money away? Because the previous ways do not seem to be working. Loan modifications sponsored by the HOPE program also include juicy contributions by Treasury to both homeowners and servicers, but that does not seem to have made much of a difference. The government is now trying to look into short sales as a more pragmatic way of dealing with the wave of foreclosures that is hitting the housing market.
HAFA is designed to speed up the process for homeowners that are seeking for alternative ways to foreclosure, but do not qualify for a loan modification. It is also a smart option for homeowners that are so underwater they do not want to even apply for a loan modification, and just want to get rid of a bad investment with the minimum damage to their credit rating.
What does the program offer? The program principally provides extra incentives to homeowners, servicers and junior lien holders to fast track a short sale application. For instance a homeowners that undergoes a short sale on their home can receive up to $3,000 for their trouble. However, this is not the most interesting feature of this new scheme. Short sales has always been a better option than foreclosing on your home, most homeowners can be helped to understand that it is in their best interest to short sale if they cannot get a loan modification and are going to foreclose on their home.
The problem is that troubled homeowners often have a second mortgage on their property. These secondary mortgage lenders are called junior lien holders. They can stall the short sale process, and often do if they feel there will not be enough money to pay them once the house or property is sold. HAFA looks to give junior lien holders an extra incentive by giving them up to $6,000 if they agree to let the short sale proceed.
This program indicates two things. First the government seems to be changing gears in their pursuit of stabilizing the housing market. The initial focus on providing loan modifications to eligible homeowners is changing. The HOPE loan modification program continues, but the government seeks to complement it by encouraging alternatives like short sales to those that are not eligible for a loan modification. Second, the Obama administration is finally looking at the real issue, most troubled homeowners are in trouble not because their mortgage interests are too high, but because they do not have a job, or enough income to pay a mortgage. It also takes into account solvent homeowners that simply want to let their homes go, and provides them a cleaner way to break their mortgage contract.
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The News is littered with horror stories of homeowners that have been taken for a red tape ride, paperwork is lost, or applications are dropped because a vital piece of paperwork that was never actually requested is missing, all while homes are ultimately and tragically lost.
What can be done to accelerate this process and avoid being a main character in one of these horror stories. The truth is that there are no magic solutions, in some cases loan modifications are simply not an option.
That said, lenders have come up with a kind of formula to speed up loan workouts. If you fit these standards you can get relatively quick help, if you don’t you must wait for the traditional case by case process. Unfortunately there are no guarantees and seemingly great candidates have also been abused by the system, but knowing the system lenders follow to fast track loan modifications can only help.
So what are the requirements?
1) Your loan must be at least 60 days past due. Some banks require at least 90 days. One of the reasons for this is that the bank needs to be sure you really can’t afford the loan. If you are struggling but can make the payments Banks are not going to want to throw money away at a loan modification.
This does not mean I am recommending you to not pay your mortgage payments. Every case is different and in some cases you have more leverage on your bank if you have a good record. Check out www.hud.gov to find out where your closest mortgage counseling office is to get personalized advice.
2) You need to prove you can’t pay your mortgage. Your expenses must exceed your income. Be ready with pertinent paperwork, you will be asked to prove this.
3) The loan modification must be a long term solution. That means the cost of the monthly payments must be under 38% of your monthly income.
4) You can’t be in bankruptcy.
5) A loan modification must be a good deal for the lender. That means that the cost of modifying your loan must be cheaper than what the lenders would lose if they went ahead and sold your home. For instance, if you live in an area where homes did not fall in price and there is a high demand of houses (not sure where that would be, but let’s imagine) then the lenders are very unlikely to accept your lower interest and reduced principal balance requests when they can simply foreclose on the mortgage and sell your home for the same price or even a potential profit.
6) You need to be able to prove that you can make the modified payments and that you will not default again.
Again, these requirements will not guarantee an approval but will increase your chances. The main point you need to get across to your bank or whoever the owner of your loan is, is that you are a good investment. That you are worth more money as a client than your home is worth with a foreclosure.
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