Throughout 2009, the National Association of REALTORS^® urged the U.S. Treasury Department, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac to improve the short sales process. The NAR’s persistence was rewarded on November 30, 2009, when the Obama Administration released guidelines and uniform forms for its Home Affordable Foreclosure Alternatives Program (HAFA). Mortgage loan servicers that are in the Home Affordable Modification Program (HAMP) must follow the HAFA procedures and policies that go into effect on April 5, 2010.

HAFA brings what REALTORS^® have been asking for when it comes to short sales: a uniform process, uniform forms and perhaps most importantly, firm deadlines.

Financial incentives 

HAFA provides financial incentives for participation in short sales:

• $1,500 for seller relocation assistance.
• $1,000 for servicers to cover administrative and processing costs.
• Up to a $1,000 maximum to investors for allowing a total of up to $3,000 in short sale proceeds to be paid to second lien holders.

Uniform short sale agreement 

HAFA allows sellers to receive pre-approved short sales terms before listing the property including the minimum acceptable net proceeds. If a borrower/seller expresses interest in a short sale to his or her loan servicer and is eligible per the basic HAMP criteria at www.makinghomeaffordable.gov, the seller will receive a standardized Short Sale Agreement (SSA) that will give the seller the list price or the net sales proceeds amount that will be acceptable to the servicer and set a maximum limit on closing costs. The seller and the listing agent will know what short sale terms are acceptable to the loan servicer in advance.

In order to accept the SSA proposed by the servicer, the seller and the listing broker must sign and return the SSA to the servicer within 14 days along with information about other liens and a copy of the listing agreement. The SSA indicates that the servicer will not reduce the real estate commission agreed upon in the listing agreement up to 6 percent. Time may be saved because the servicer uses any borrower financial and hardship information already collected under HAMP. The SSA must give the seller an initial period of 120 days to sell the house, although extensions are permitted up to a total of 12 months.

Request for approval of short sale 

If the seller accepts an offer that meets the SSA requirements, the seller has three business days in which to submit a Request for Approval of Short Sale (RASS) to the servicer, along with a copy of the offer to purchase and all addenda, and the buyer’s documentation of funds or pre-approval/commitment letter on letterhead from a lender. The deal must be at “arms length.” Sellers cannot sell the property to a relative or anyone else with whom they have a close personal or business relationship.

Within 10 business days of receipt of the RASS and all required attachments, the servicer must indicate its approval or disapproval of the proposed sale by signing the appropriate section of the RASS and mailing it to the seller. The servicer must approve a RASS if the net sale proceeds available for payment to the servicer equal or exceed the minimum net determined by the servicer prior to the execution of the SSA and all other sales terms and conditions in the SSA have been met. The servicer may require the closing to take place within a reasonable period after approving the RASS, but not sooner than 45 days from the date of the contract unless the seller agrees otherwise. The servicer must indicate its reasons if the RASS is not approved.

Deficiency forgiveness 

The servicer must release its first mortgage lien within 10 business days or earlier if required by state or local law after receipt of the sales proceeds from a short sale. Investors must waive their rights to seek deficiency judgments and may not require a promissory note for any deficiency. In other words, the seller must be fully released from future liability for the first mortgage debt and, if the subordinate lien holder receives an incentive under HAFA, that debt as well (no cash contribution, promissory note or deficiency judgment is allowed). The amount of debt forgiven, however, might be treated as income for tax purposes if the Mortgage Forgiveness Debt Relief Act of 2007, which is in effect through the end of 2012, does not apply. Visit www.irs.gov/irs/article/0,,id=179073,00.html for more information from the Internal Revenue Service.

The HAFA guidelines do not apply to mortgages that are owned or guaranteed by Fannie Mae or Freddie Mac, or to Federal Housing Administration or Veteran loans. Fannie Mae and Freddie Mac, however, are developing programs based on the federal HAFA standards that hopefully will be released soon.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.