In May 2009, Treasury issued a press release announcing the preliminary plan for a foreclosure alternatives program for short sales and deeds-in-lieu of foreclosure (DIL). On November 30, Treasury unveiled the Home Affordable Foreclosure Alternatives (HAFA) program in Supplemental Directive 09-09. The Directive includes the guidelines and requirements for participation in the HAFA short sale and DIL program, and a document package to help servicers streamline the process. Like HAMP and the Second Lien Modification Program (2MP), the HAFA program involves significant data and document collection and short timelines that will present yet more challenges for servicers.
Servicers are probably happy to know that Supplemental Directive 09-09 applies only to first lien mortgage loans that are not guaranteed or owned by Fannie Mae or Freddie Mac (Non GSE Mortgages). Since the vast majority of mortgage loans are owned or guaranteed by Fannie or Freddie, the number of loans that will be subject to the HAFA requirements will not be great, at least in the short term. Fannie and Freddie will issue separate announcements to servicers with the details of HAFA, so be on the lookout for those announcements.
HAFA requires servicers to develop a written policy that describes the basis upon which the servicer will offer a short sale or DIL to borrowers. The policy may incorporate factors such as the severity of the loss involved, local market conditions, the timing of pending foreclosure actions and borrower motivation and cooperation. Supplemental Directive 09-09 sets forth some basics that must be part of the policy. The policy will also need to incorporate the appropriate timelines, notice requirements, recordkeeping requirements, and credit bureau reporting, among other details. This article focuses primarily on identifying the timing of critical events that servicers will need to satisfy.
The first step in determining a borrower’s eligibility for a HAFA option is to determine a borrower’s eligibility for a HAMP modification. This means that the property at issue is the borrower’s principal residence; the first lien mortgage was originated on or before January 1, 2009; the mortgage is delinquent, or default is reasonably foreseeable; the current principal is less that $729,750; and the total monthly mortgage payment exceeds 31% or the borrower’s gross income. Every potential borrower must be considered for HAFA before the servicer refers the loan to foreclosure or allows a foreclosure sale to proceed (but note that the Directive also indicates that a servicer can initiate a foreclosure during the HAFA process).
The HAFA timeline includes numerous critical events. The following is the general process flow under HAFA:
30-Day Consideration: Within 30 days of one of the following four events, a servicer must consider for HAFA a borrower who:
(1) does not qualify for a HAMP Trial Period Plan;
(2) does not successfully complete a Trial Period Plan;
(3) is delinquent on a HAMP modification by missing two consecutive payments; or
(4) requests a short sale or DIL.
Written Solicitation: The time for sending this solicitation is not specified in the Supplemental Directive, but if the servicer has not already discussed HAFA options with the borrower, the servicer will need to send a written solicitation. The borrower will have only 14 calendar days to respond by phone or mail to request consideration for HAFA. If there is no contact from the borrower, then the servicer has no further obligation to consider the borrower for HAFA.
Evaluation for HAFA Option: If the borrower requests consideration, the servicer needs to perform a financial analysis to determine if a short sale or DIL is in the best interest of the investor, guarantor, and/or mortgage insurer (note the HAMP NPV test is not designed for short sales or DIL); obtain an independent property valuation; and review title.
Borrower Notice of Denial: If, after evaluation, a HAFA short sale or DIL is not available, the servicer must send a written notice explaining why a short sale or DIL cannot be offered, provide a toll free number to discuss the decision, and “otherwise comply with the notice requirements of Supplemental Directive 09-08.” For purposes of the timeline, compliance with Supplemental Directive 09-08 (the Borrower Notice Supplemental Directive) means that the servicer must send the notice within 10 business days following the date that the servicer determines the borrower is not eligible for HAFA.
Short Sale Agreement (SSA): If, after evaluation, the borrower qualifies for a short sale under the program, the servicer must send the SSA letter outlining the terms and conditions of the short sale. The borrower has 14 days from the date of the letter to accept the terms of the short sale offer by retaining a broker to list the property and signing and returning the SSA. The Supplemental Directive is silent as to the servicer’s obligations if the borrower fails to meet the 14-day deadline. The servicer will want to have policies and procedures in place to ensure uniform treatment of borrowers if they will consider a short sale under HAFA after the deadline has passed.
Term of SSA: The terms of the SSA must be good for at least 120 calendar days from the date of the SSA letter and can be extended for up to 12 months. If the servicer extends the SSA beyond 120 days, the servicer can change the minimum amount it will accept and must document each such change.
Request for Short Sale Approval (RSSA): Within three business days of receiving an executed sales contract, the borrower must submit a request for approval on the RSSA form.
Response to RSSA: The servicer has ten business days to approve or disapprove the RSSA.
Sale after approval of RSSA: The servicer can require that the sale close within a reasonable time after approving the RSSA, but the servicer cannot require that closing in less that 45 calendar days from the date of the sales contract without the borrower’s consent.
Borrower Relocation Assistance: Upon successful closing, the servicer must instruct the settlement agent to pay the borrower $1,500 from the sale proceeds at the time all other payments are disbursed (note that this amount must appear on the HUD-1).
Release of Lien: Within 10 business days (or earlier if required by law) after receipt of the sales proceeds, the servicer must release its first mortgage lien.
Credit Bureau Reporting: The servicer must use the appropriate METRO 2 Code at next reporting after disposition by short sale (Account status code 13/Paid or closed/zero balance in conjunction with Special Comment Code AU/account paid in full for less than the full balance) or DIL (Account status code 89/Deed-in-lieu of foreclosure on a defaulted loan).
Record Retention: The servicer must retain all records for seven years from the date of collection.
Request for incentive payments: The Directive does not specify when the servicer may submit the request for incentive payments.
Of course there are deviations from the process when: (1) the borrower already has a sales contract but has not yet been considered for HAFA; or (2) a short sale is not an option or is not successful. Supplemental Directive 09-09 provides alternative timelines to address these scenarios.
For the first scenario, there is the “Alternative Request for Approval of Short Sale” (Alternative RSSA). In this situation, the borrower must submit the Alternative RSSA form to the servicer. Upon receipt of the Alternative RSSA form, the servicer must determine basic eligibility under HAMP. If the borrower appears to be eligible for HAMP, the servicer must notify the borrower, verbally or in writing, of the HAMP modification option and allow the borrower 14 days from the date of notification to contact the servicer and request consideration for a HAMP modification. The servicer must also verify the borrower’s financial information. If the borrower does not want to be considered for a HAMP modification, the servicer may consider the Alternative RSSA in accordance with the above timeline.
The second scenario – when a short sale is not an option or is not successful – the servicer has the discretion to accept a DIL. Servicers can make this option available in one of two ways: (1) by including the requirements for a DIL in the SSA or (2) by entering into a separate Deed-in-Lieu Agreement (DIL Agreement). To be eligible for the incentive payment, the servicer does not need to require the borrower to attempt to market and sell the property under a SSA. As such, the servicer can move right to a DIL Agreement at the beginning of the consideration process under HAFA. If a borrower can satisfy the terms of the DIL Agreement, then the only additional “critical” date will be the vacancy date, which must be at least 30 calendar days from the date of termination of the SSA or DIL Agreement, unless the borrower agrees to an earlier date.
In addition to meeting the critical events in a timely manner there obviously are other important features of the HAFA program. A servicer will need to ensure that the policy addresses (1) minimum acceptable net proceeds from a short sale, (2) allowable transaction costs in a short sale, (3) monitoring the borrower’s financial condition; (4) monitoring the broker’s marketing efforts during the term of the SSA, (5) monitoring for bankruptcy, (6) ensuring that no fees are charged to the borrower under a successful HAFA disposition and determining those fees that can be passed along to the borrower if the disposition is unsuccessful, and (7) the nature and extent of involvement that the servicer will have with the junior lienholders in attempting to release subordinate liens.
As servicers work through the policy and implementation issues, they are likely to encounter some of the same problems that they have already seen with HAMP, including difficulty in securing required documentation from borrowers and working with junior lienholders to achieve a favorable disposition for the borrower. Servicers should also expect that, if HAMP is a predictor, they will seek more supplemental directives and FAQs to clarify some of the requirements under Supplemental Directive 09-09 or to address issues that were not part of the Directive.
Lisa DeLessio is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Lisa at 410-865-5437 or ldelessio@hudco.com.