The Obama administration last week introduced a program to encourage lenders to forgive some of the mortgage debt owed by homeowners. The purpose is to help people remain in their homes and reduce foreclosures.
But the housing crisis is so huge that no one initiative can solve it all. So another kind of help is on the way. It's aimed at homeowners who can't afford to remain in their homes and instead want to sell them.
Starting April 5, homeowners who qualify will be able to participate in the Home Affordable Foreclosure Alternatives program, or HAFA. The program is the Obama administration's latest initiative to improve the severely depressed housing market. HAFA will make it easier for financially struggling borrowers to sell their homes through a "short sale" process rather than foreclosure.
To qualify for HAFA, these conditions must be met:
- The borrower must use the house as a principal residence.
- The mortgage had to originate before 2009.
- Mortgage delinquency or default is reasonably foreseeable.
- The unpaid principal balance on the mortgage can't exceed $729,750.
- The borrower's total monthly payment must exceed 31 percent of gross income.
Source: National Association of Realtors
It is designed for the homeowner who has a mortgage that he or she no longer can afford because of factors such as a job loss, pay cut or run-up in interest costs under terms of a subprime mortgage.
In many cases, a homeowner may be able to work out a loan modification with a lender to reduce monthly mortgage payments. But some owners simply have to sell because they no longer can afford their home's upkeep.
With prices still so depressed, they may not be able to sell their houses for enough money to pay off existing loans. Usually, that situation leads to a foreclosure, wherein the lender takes possession of the house and the former owner gets evicted.
That's a losing proposition for everyone: The seller's credit record gets ruined for years and the lender gets stuck with yet another house to sell in a depressed market. For the lender, the legal fees and cost of maintaining a vacant house add up quickly.
A better option can be a short sale. In this type of transaction, the lender agrees to accept less than what the current homeowner owes on the mortgage. For example, a homeowner may have a $200,000 mortgage, which was obtained when the house was appraised at $220,000. But in today's market, the seller may be able to get only $180,000 for the house.
In a short sale, the lender agrees to accept $180,000 and forgive the rest of the debt. All parties avoid the stigma, hassle and high cost of foreclosure.
Although short sales seem to make sense financially, they have not been used as frequently as many people would have liked in this depressed market. That's because the guidelines for completing such transactions were not clear or uniform across the industry.
"Short sales are often riddled with delays and red tape," Vicki Cox Golder, president of the National Association of Realtors, said in a recent prepared statement.
The goal of HAFA is to streamline the short-sale procedure, clarify guidelines and set deadlines for completing deals. It also creates a process for the homeowner to get preapproved short-sale terms even before listing the property. Knowing what terms would be acceptable to the lender would speed up the entire sales process.
In addition, the government will provide cash incentives for completing short sales. Taxpayers will provide up to $3,000 per sale to help pay the homeowners' relocation expenses. They also will give lenders up to $1,000 to cover administrative fees for each transaction.
Launching HAFA is "a crucial step towards reducing problems with the short sale process," Cox Golder said.