April 5 was the deadline for lender implementation of the Home Affordable Foreclosure Alternative program. This program is a subset of the Home Affordable Modification Program promulgated by the Department of Treasury. Lenders participating in one program will now participate in the other.
The alternative program is being touted by the government and groups such as the National Association of Realtors as a real solution to the difficult and cumbersome process of obtaining short sale approval, however, given the current track record of the modification program — 168,000 permanent modifications nationally according to the February 2010 report by the treasury — the potential success of the alternative program is open to debate.
That program has the potential to further complicate the already lengthy process of short sale approval. It is a bit complex with 43 pages of guidelines and forms, designed to simplify and streamline the use of short sales. I am not so sure the program can be described as complex yet effectively streamlines the short sale process.
The second criticism is that there are no teeth to the program, meaning lenders are not required to approve the short sales. Moreover, not all lenders have to participate. Fannie Mae and Freddie Mac are supposed to be developing their own guidelines for their short sale program, which will add to the murky guidelines that already exist.
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Guidelines are not law. This foreclosure alternative plan is only for affordable modification servicers that elect to implement it and submit their election by the end of the year. The guidelines are merely suggestions, and servicers can choose to abide by them or not. For example: the Home Affordable Foreclosure Alternative guidelines provide that once the Request for Approval of Short Sale form, short sale purchase offer and buyer proof of funds have been submitted, the servicer has 10 days to approve or reject the offer.
However, there is no provision or consequence for a tardy servicer. Thus, servicers may continue to ignore time periods and deadlines. The 10-day period is only a period for rejection of a short sale offer or acceptance into the short sale process, and the offer is still subject to approval by the ultimate investor as well as the mortgage insurer.
The incentives offered to servicers who allow junior liens like second mortgages, mechanics liens or Association Claim of Lien an aggregate of $3,000 currently does not make for any less of a battle between lien holders. Junior liens can still stubbornly demand more than they are allowed by the primary lien holder and hold up the short sale process. Junior liens also will have to provide their approval prior to the short sale approval from the first mortgage.
What’s good about it?
So is there anything positive about the Home Affordable Foreclosure Alternative program? Yes!
The relocation assistance money provided to borrowers — up to $1,500 — will be helpful to many. Borrowers may remain in the property and maintain the good condition rather than abandoning the real estate. Additionally, the cancellation or forgiveness of the underlying mortgage balance by the lender may help some borrowers achieve finality regarding their home mortgage crisis.
However, this cancellation or forgiveness of debt is a taxable event; therefore, borrowers may owe additional income tax. Borrowers who are considering the short sale alternative to foreclosure still need to seek out the assistance of an accountant or tax professional regarding possible tax consequences of the short sale before they decide to participate. Borrowers also should seek out legal assistance before moving forward with the short sale process.
Speeding up things
For Realtors, especially listing agents, the option of getting a pre-approved minimum net proceeds required in order to close the real estate transaction, from the borrower’s lender, may speed up the marketing period for short sale listings and make those properties with the known minimum net proceeds amount more attractive to potential buyers. Another positive consequence will be to encourage more borrowers to participate in a short sale, which may offer them finality and help them avoid foreclosure.
What truly makes Home Affordable Foreclosure Alternative significant is that its implementation is a signal that the government, lenders and servicers recognize that the foreclosure rate and rates of default are not declining and that there has to be a more efficient way to move the real estate inventory in order to begin to see a recovery in the housing market.
Cynthia A. Riddell, an attorney whose practice primarily focuses on real estate foreclosure, short sale and bankruptcy issues, can be reached at (941) 366-1300, ext 1313.