Things You Should Know About HAFA: The Home Affordable Foreclosure Alternatives Program
On April 5, 2010 a new program called the Home Affordable Foreclosure Alternatives, or HAFA, will further expand the foreclosure prevention efforts of the Obama administration. This program is meant to encourage short sales instead of foreclosures. Here are some details about the program and the issues troubled homeowners should consider before applying.
A short sale is basically a home sale where the lender forgives a part of the loan. For example, an underwater borrower could currently have a mortgage debt of $300,000, but the house is only worth $200,000. In this case the lender could approve a short sale of $200,000 and forgive the rest of the debt. Unfortunately, currently many short sales do not close escrow mostly due to slow approval on the part of the lenders. The purpose of HAFA is to give incentives to sellers, lenders, and investors to complete short sales.
To qualify for HAFA borrowers must meet the following requirements:
- The loan has to be a first lien mortgage originated on or before January 1, 2009. This means homes with second mortgages will not qualify since there is a second lender in the mix.
- The house in question must be the borrower's primary residence.
- The mortgage payments have to be more than 31% of the borrowers' incomes.
- The home also has to be listed by a broker, and not by the seller.
- The mortgage is delinquent and headed to default.
- The current unpaid balance on the mortgage has to be less than $729,750
The cash incentives under HAFA is that the seller gets $1,500 in moving expenses, and the lenders approving the short sale would get $1,000.
Before attempting any short sale, homeowners should check the tax consequences because the forgiven debt may count as ordinary income and end up being taxed. Usually after a short sale the lender will send the seller a 1099 at the end of the year showing the amount of debt that was forgiven. Currently in California those who got rid of their homes in short sales in 2009 are on the hook for huge tax bills because California's income tax law treats the forgiven debt as ordinary income. The IRS currently has an federal tax exemption on the forgiven debt due to the Mortgage Forgiveness Debt Relief Act of 2007, but this exemption is temporary and expires in 2012. The federal tax exemption only applies to debt used to purchase or improve a primary residence, so those who used cashed out their equity and bought other things would not qualify.
Besides the issue of taxes, if you read the terms of HAFA more carefully you will see that the lender has the option to determine whether or not a short sale or deed in lieu of foreclosure is in the best interest of the lender. A deed in lieu of foreclosure is essentially a voluntary foreclosure and the lenders would save quite a bit of money if you agree to one since they do not have to go through the entire judicial process of a full foreclosure. If you participate in HAFA you actually agree to a deed in lieu of foreclosure if the short sale fails. The seller has to make payments during the short sale process during HAFA or the lender can immediately take the home via the deed in lieu clause. The HAFA agreement also says that the lender or investor must give at least 120 days for the sale, but if the home does not sell within 120 days the lender could just take the home via the deed in lieu of foreclosure.
Will this program spawn a lot more short sales? Personally I think the terms of the program are ultimately not in the interest of the sellers. If you want to pursue a short sale it is probably best to start negotiating with your lender right now outside of HAFA.
What do you think about this program? Have you ever completed a short sale?