Home Affordable Modification Program
The Home Affordable Modification Program (HAMP) is a federal program designed to help homeowners avoid foreclosure by modifying loans to an affordable and sustainable amount. The program provides loan modification guidelines for the mortgage industry to use.
Borrower eligibility is based on meeting the following criteria:
- The property can be owner-occupied or it can be a rental.
- The borrower is delinquent or faces an imminent risk of default. If the property is not owner-occupied, then the borrower must be delinquent.
- The mortgage was originated on or before January 1, 2009.
- The unpaid principal balance must be less than $729,751 for one-unit properties.
- If a 2-unit property, the unpaid balance must be less than $934,201.
- If a 3-unit property, the unpaid balance must be less than $1,129,251.
- If a 4-unit property, the unpaid balance must be less than $1,403,401.
- The property must not be condemned.
- The borrower must show sufficient income to support a modified payment.
If the lender or servicer determines that a borrower is eligible for a HAMP modification, they can take a series of steps to adjust the monthly mortgage payment to 31% of the borrower’s total pretax monthly income. The steps are:
- First, reduce the interest rate to as low as 2%.
- Next, if necessary, extend the loan term to 40 years.
- Finally, if necessary, defer (forbear) a portion of the principal until the loan is paid off and waive interest on the deferred amount.
Borrowers whose debt ratio is already below 31% may still qualify. A borrower who previously defaulted on their HAMP trial period plan could still qualify again for the program.
Lenders and servicers may elect to forgive some principal at their discretion to achieve the target monthly mortgage payment. The HAMP program provides incentives to lenders, servicers, and investors who cooperate.
Home Affordable Foreclosure Alternatives
In 2009, the Treasury Department, working in conjunction with the Department of Housing and Urban Development (HUD), introduced the Home Affordable Foreclosure Alternatives (HAFA) program to provide additional options for borrowers who are unable to keep their homes through the HAMP program. HAFA took effect on April 5, 2010 and eligibility ends on December 31, 2013. For people who are accepted into the program in December 2013, they must sell their property by September 30, 2014.
The HAFA program offers incentives to borrowers, lenders, servicers, and investors who utilize a short sale or deed-in-lieu to avoid foreclosure. HAFA streamlines the short sale and deed-in-lieu process across participating banks by using standardized paperwork and establishing minimum performance deadlines.
HAFA alternatives are available to all HAMP-eligible borrowers who:
- Do not qualify for a Trial Period Plan.
- Do not successfully complete a Trial Period Plan.
- Miss at least two consecutive payments during a HAMP modification.
- Request a short sale or deed-in-lieu of foreclosure.
The eligibility criteria for HAFA include:
- The borrower has a documented financial hardship.
- The borrower has not purchased a house in the previous 12 months.
- The first mortgage balance is less than $729,751.
- The mortgage was originated on or before January 1, 2009.
- In the past 10 years, the borrower cannot have been convicted of theft, felony larceny, money laundering, fraud, or tax evasion in a real estate transaction.
- The loan is serviced by a participating servicer or lender. The list of participating servicers and lenders can be viewed at http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/hamp.aspx.
In a short sale under the HAFA program, the borrower is permitted to list and sell the property. Generally, if the borrower makes a good faith effort to sell the property but fails to sell it, the lender may consider a deed-in-lieu of foreclosure if there are no other liens.
If the borrower qualifies for the HAFA program, the servicer may not demand a cash contribution or promissory note from the borrower. Furthermore, the servicer will not be allowed to pursue a deficiency judgment against the borrower. The proceeds of the sale of the property represent full and final satisfaction of the note.
Under HAFA, the servicer uses the financial and hardship information already collected when considering a loan modification under HAMP. The borrower can receive pre-approved short sale terms before listing the property for sale. The servicer can state the minimum acceptable net proceeds or the minimum acceptable sales price. That pre-approval provides the listing agent with valuable information that can make a listing more effective in generating a solid offer.
A HAFA-approved homeowner will receive $3,000 for relocation assistance. However, if a tenant is residing in the property at the time of the sale, then the tenant will receive the $3,000 instead of the homeowner. This payment is made at settlement or upon post-settlement move-out by the occupant. The servicer is given $1,500 to cover processing costs. The investor (lender) is given up to $5,000. Secondary lienholders can receive up to $8,500 in short sale proceeds, on a one-for-three matching basis.
Once a HAFA short sale pre-approval is granted, the listing agent has 120 days to procure a buyer. The listing period could be extended up to 12 months. The real estate commission will be six percent, as long as the listing contract states that the commission is at least six percent.
Lenders must make a decision regarding a borrower’s HAFA eligibility within 30 days of receipt of a completed application. Some sellers can have what is known as a “pre-determined hardship.” Those sellers must be 90+ days delinquent and have a FICO score less than 620. Those who do not have a pre-determined hardship could still qualify for HAFA but will need to explain their hardship in an affidavit. HAFA sales must be an arms-length transaction, and the parties will be expected to sign an affidavit.
Effective June 1, 2012, if a HAFA-approved borrower sells their house via the HAFA program and they were current on their mortgage at the time of the sale, then the lender must report the loan as paid in full to the credit bureaus. In theory, a person who is current on their mortgage could sell their house via a HAFA short sale one day and qualify for a mortgage loan the next day.
The HAFA program guidelines vary slightly between Fannie Mae, Freddie Mac, FHA, and lenders of non-government backed loans.
HAFA short sales contain a deed restriction. A buyer of a HAFA short sale cannot sell the property until after 30 days have transpired from the date of the purchase. If the property is sold within 31 to 90 days after the purchase, the sale price cannot 120 percent of the HAFA short sale price.
The majority of short sales are traditional, non-HAFA short sales. However, the HAFA program provides great benefits for sellers. Participating lenders typically will consider a borrower for HAFA first, before considering a traditional short sale. A borrower may request a HAFA packet from their lender.
FHA Preforeclosure Sale Program
FHA provides mortgage insurance on loans made by FHA-approved lenders. FHA is the largest mortgage insurer in the world. FHA became part of the Department of Housing and Urban Development (HUD) in 1965.
Below are the criteria for participation in the HUD Preforeclosure Sale (PFS) Program:
- The home must be owner-occupied, with exceptions made for death, divorce, forced job relocation, or unemployment.
- Investment properties or strategic defaults do not qualify for the PFS Program.
- The property must be listed with a licensed real estate agent who is not related to the borrower.
- The short sale must be an arms-length transaction, whereby the buyer cannot be a relative or business associate of the seller.
- The borrower must be at least 31 days behind on their mortgage payment when they sell the property.
- The property is to be listed on the market for at least four months, with the potential to keep it on the market for an additional 12 months.
- Real estate commission cannot exceed six percent of the sale price.
- The borrower must submit documentation proving the inability to continue making payments.
- The buyer will be allowed a seller closing cost assist up to one percent if the buyer is obtaining an FHA insured purchase money mortgage. If the buyer needs more, a variance has to approved by HUD.
- HUD will allocate up to $1,500 toward secondary liens.
- HUD will not pay for:
o Title insurance
o A home warranty
o Repair reimbursements
o Discount points for non-FHA financing.
- A relocation incentive up to $1,000 will be paid to the seller if the sale occurs within three months from the date of application. Thereafter, the incentive is reduced to $750.
- The lender must order an FHA appraisal, which will contain the “As-Is” Fair Market Value (FMV). The appraisal is valid for 120 days. The appraisal must be provided to the borrower or real estate agent upon request.
If the property is approved for the PFS Program, an Approval to Participate (ATP) is issued. The date of the form becomes the starting date of the PFS participation. The ATP is a short sale pre-approval. It will state the date by which a signed sales contract must be obtained and the minimum acceptable sale price. The ATP is valid for four months and can be automatically extended for two months if there is an accepted Agreement of Sale with a buyer. The lender has to delay the foreclosure proceeding during that period.
Once the ATP is issued, one can predict the acceptable sale price if it is below the amount stated in the ATP. HUD adheres to the following Tiered Net Sales Proceeds guidelines:
- For the first 30 days of marketing, lenders may only approve offers that will result in a minimum net sales proceeds of 88 percent of the As-Is appraised value.
- For the next 30 days of marketing, lenders may only approve offers that will result in a minimum net sales proceeds of 86 percent of the As-Is appraised value.
- For the duration of the PFS marketing period, lenders may only approve offers that will result in minimum net sales proceeds of 84 percent of the As-Is value.
For example, let’s say that FHA issues an ATP with a pre-approved sale price of $100,000, which would have been the As-Is appraisal value. The minimum acceptable net proceeds for an offer accepted in month 1 of the marketing period would be $88,000. That does not mean the sale price can be $88,000. That means that after real estate commission, attorney fee, real estate transfer tax, and closing costs are paid, then FHA must receive at least $88,000. So, assuming that commission, taxes, and closing costs add up to $9,000, the sale price could be $97,000. If an Agreement of Sale were signed in month 3 of the marketing period, then the minimum acceptable net proceeds would be $84,000. Therefore, a buyer could purchase the property for a little less money than earlier in the marketing period.
Sometimes the As-Is appraisal value is well above what buyers are willing to offer. FHA has the following appraisal dispute guidelines (which are not published publicly by HUD but we learned from experience):
- FHA must be provided with three to four comparable sales that sold in the six-month period prior to the date that the appraisal was completed.
- The comparables must be full, Agent Detail Multiple Listing Service (MLS) sheets showing the sold date, sold price, and property description.
- Sales used in the original appraisal cannot be submitted as dispute comparables.
- The comparables must be submitted via email, not via fax or regular mail.
- The seller needs to be advised that the dispute decision is final.
- If the approval is granted to order a second appraisal, the As-Is FMV is final, even if it is higher or unchanged.
There is a serious flaw in the FHA appraisal dispute process. They do not take into account a declining market or a deteriorating house. FHA demands the dispute comparables be ones that sold in the six-month period prior to their appraisal. However, if the property has been on the market for multiple months, those comparables are too old and no longer indicative of the market condition. Furthermore, the house could be losing value due to deferred maintenance, and FHA does not properly account for property deterioration. Therefore, it is critical for the seller or listing agent to liaison with the appraiser ahead of time so the appraiser is made aware of the market conditions.
Fannie Mae and Freddie Mac
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) make loans and loan guarantees. Both are regulated by the Federal Housing Finance Agency (FHFA), which acts as a conservatorship. Fannie Mae and Freddie Mac both permit short sales.
On November 1, 2012, Fannie Mae and Freddie Mac implemented a consolidated, more streamlined short sale approach known as the Standard Short Sale / HAFA II. These new guidelines allow homeowners with Fannie or Freddie mortgages and who have a documented hardship to pursue a short sale even if they are current on their mortgage payments.
If someone is current on their mortgage, they must be occupying the house as their principal residence. If someone is using the property as a vacation home or investment property, they must be behind on their payments by more than 30 days to be eligible for the program. The property can be vacant but cannot be condemned.
The borrower’s total monthly debt ratio, which is the ratio of the borrower’s current monthly qualifying expenses divided by the borrower’s current monthly qualifying income, must be greater than 55 percent. Military personnel are exempt from the 55 percent requirement. Servicers of will be able to quickly qualify distressed borrowers without waiting for approval from Fannie or Freddie.
The Standard Short Sale / HAFA II program promises a faster process for those who are behind on their payments. Fannie and Freddie will allow up to $6,000 to be paid to a secondary lien holder. The subordinate lien holders must agree to release the borrower from any further debt obligation if they are receiving money from the settlement.
The program calls for servicers to review and respond to a signed buyer offer within 30 days of receiving them. The servicers must provide weekly status updates to the borrower if the offer is still under review after 30 days. The servicers must make and communicate the final decision to the borrower within 60 days of receipt of the offer and a complete borrower response package. Note that even though an offer may have been submitted, the servicer is not obligated to respond within the 30-60 day timeframe if they claim that the homeowner did not submit a complete borrower response package. It is crucial for a borrower to ensure that all the requested paperwork is submitted in a timely fashion.
Fannie and Freddie will waive the right to pursue a deficiency judgment in exchange for a financial contribution when a borrower has sufficient income or assets to make a cash contribution or sign a promissory note. Someone could be asked to make a cash contribution if their cash reserves, including assets such as savings, money market funds, marketable stocks or bonds (excluding retirement accounts) are greater than $10,000 or six times the monthly mortgage payment including principal, interest, tax, and insurance (PITI). If the servicer determines that the borrower has the capacity to make a cash contribution, the servicer must initially request a contribution of 20 percent of the liquid reserves, not to exceed the deficiency. If a borrower who is more than 30 days delinquent is unwilling or unable to contribute 20 percent of their cash reserve, the servicer could potentially accept less as long as there is a specific circumstance that limited the borrower’s ability to make a full contribution.
The servicer must evaluate a borrower for a promissory note if the borrower’s future debt-to-income ratio is less than 55 percent. If a borrower is deemed to have the capacity to make a promissory note contribution, the servicer must request a five or 10 year term with a payment the borrower can afford in the future. There will be no interest charged. If the borrower is unwilling or unable to agree to the promissory note payment, a lower amount could be negotiated as long as there is a specific circumstance that limited the borrower’s ability.
Military personnel who have Permanent Change of Station (PCS) orders will be automatically eligible for a short sale, even if they are current on their payment. They will not be obligated to contribute funds to cover the shortfall.
If an owner-occupant sells their house, and if they were not asked to make a contribution, they will receive a $3,000 relocation incentive.
The sale must be an arms-length transaction. All parties will be expected to sign an affidavit to attest that it is truly an arms-length sale.
The program also allows a real estate commission equivalent to six percent of the sale price. A real estate agent could agree to take less commission. The servicers are expected to provide list price guidance to the borrower after Fannie or Freddie approves a suggested list price and minimum acceptable net proceeds.
There is a deed restriction which prohibits a resale, or flip, of the property within 90 days after the short sale transaction.
HARP and HARP 2.0
HARP is a federal government program for people who are current on their mortgage payments but have been unable to refinance their mortgage. To be eligible, the mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac, and it the sale to Fannie or Freddie must have occurred before June 1, 2009. The mortgage cannot have been refinanced under HARP unless it was a Fannie Mae loan that was refinanced via HARP from March to May of 2009.
The loan-to-value (LTV) ratio must be greater than 80 percent. That means that there must be at least 20 percent equity in the property. The borrower must be current on the mortgage, with an on-time payment history for the previous year.
HARP 2.0, a revised version of the original HARP, ends on December 31, 2013. Not all mortgage servicers participate in the program. People looking to refinance through HARP will need to complete a loan application and go through the underwriting process. Refinance fees will be charged.
HARP 2.0 is designed to help borrowers who could not refinance to a more affordable interest rate but still paid their mortgage on time.