On November 30, 2009, the Treasury Department released some exciting news and requirements for its new Home Affordable Foreclosure Alternatives Program (HAFA). As part of the Home Affordable Modification Program (HAMP), HAFA is set to assist distressed homeowners obtain pre-determined short sale agreements that will enable both buyer and seller (banks) to sell the property quickly compared to today’s traditional short sale process, which often times is long, drawn out and not always successful in closing.  Thus foreclosing on the property.

The HAFA program intends to provide incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program.  What this means for the distressed homeowner?  Let’s explore what this looks like.

• Homeowner applies for a Home Loan Modification
• Lender reviews the loan modification packet
• Homeowner does not qualify for modification
• Upon declination of the modification request, Lender counter offers the modification with an approved short sale agreement
• Homeowner finds an agent to list and market the property immediately
• Buyer makes offer to homeowner and closing can occur within 30 days of contract acceptance (This is faster than the 3-6 month wait time with traditional methods)

Servicers participating in HAMP are also required to comply with HAFA. A list of servicers participating in HAMP is available at MakingHomeAffordable.gov.

HAFA applies only to loans that are not Fannie Mae or Freddie Mac. They have plans on releasing their own versions of HAFA in coming weeks.

HAFA is a complex program, with over 40 pages of guidelines and forms It is designed to simplify and streamline the traditional methods of short sales and deeds-in-lieu of foreclosure.

A brief overview of what to expect with HAFA:

• Compliments HAMP by providing a fast and effective alternative for the current homeowners who are HAMP eligible or ineligible but nonetheless unable to keep their home.
• It utilizes the borrower’s financial and hardship information already collected in connection with consideration of a loan modification.
• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• Uses standard processes, documents, and timeframes/deadlines.
• Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).
• Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.

The program does not take effect until April 5, 2010, but servicers may implement it before then if they meet certain requirements. The program sunsets on December 31, 2012.