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Home Affordable Modification Program: Overview

The Home Affordable Modification Program is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Borrower eligibility is based on meeting specific criteria including:

1. Borrower is delinquent on their mortgage or faces imminent risk of default.

2. Property is occupied as borrower’s primary residence.

3. Mortgage was originated on or before Jan. 1 2009 and unpaid principal balance must be no

greater then $729,750 for one-unit properties.

After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:

First, reduce the interest rate to as low as 2%

Next, if necessary, extend the loan term to 40 years,

Finally, if necessary, forebear (defer) a portion of the principal until the loan is paid off and waiver interest on the deferred amount.

Note: Servicers may elect to forgive principal under HAMP on a standalone basis or before any modification step in order to achieve the target monthly mortgage payment.

The HAFA Mortgage Program

HAFA – Home Affordable Foreclosure Alternatives

In light of the rising number of property foreclosures in the United States, the government has expanded the Home Affordable Modification Program (HAMP) to include provisions and incentive for servicers to allow short sales or deed-in-lieu as positive options for eligible homeowners in default who wish to avoid foreclosure. The new program is called Home Affordable Foreclosure Alternatives (HAFA).

Participation in HAFA cannot save the homeowner form losing his or her property, but it can eliminate the effects of a foreclosure on the homeowner’s credit. Financial incentives for participation in the program include a $1,000 servicing bonus for lenders and a $1,500 relocation bonus for displaced homeowners. HAFA is designed for homeowners who have applied to HAMP for assistance but have had no success with their loan modification program. To participate in HAFA, homeowners must still meet HAMP’s eligibility criteria (principal residence, first-lien mortgage, serious delinquency, unpaid balance under $729,750, and a mortgage payment over 31% of gross income). Homeowners must be considered for HAFA within 30 days if they cannot meet HAMP’s requirements of it they specifically request consideration for HAFA. However, the homeowner only has 14 days to respond to a written notice that HADA may be available to them, giving the lender time to meet their 30-day deadline. As with other short sales and deeds-in-lieu, the lender or loan servicer of the primary mortgage must approve of the transaction and conduct their own independent appraisal. Under HAFA, however, they must also agree to accept the proceeds from the sale of the house as payment in full, waiving their right to collect the balance of the loan from the homeowner.

It is up to the lender or servicer of the first-lien mortgage whether they or the homeowner negotiate with any subordinate lien holders. Lenders of HELOCs and other subordinate liens may be allowed to keep a limited portion of the proceeds (up to $3,000 each) of a short sale, with the first-lien lender’s approval. These funds are part of an incentive program for subordinate lien holders to waive their right to collect the balance due on their loans. The original lender may not be held responsible if any subordinate lien holders decline to participate and decide to sue the borrower for the amount of their unpaid debt.

HAFA’s Short Sale Agreement (SSA) has certain stipulation for all parties involved. Their SSA

requires that the deadline for the homeowner to find a buyer and complete the transaction be not less than 120 calendar days from the date the SSA is mailed to the homeowner. Then lender has the option of extending this deadline another 245 calendar days, for a total term of 12 months. The SSA also mandated that a HAFA transaction must be ‘arms-length,’ and that the end buyer must agree to hold the property for at least 90 days after closing. Finally, the SSA gives the listing real estate agent the right to an undiscounted 6% commission at closing.

A short sale is any sale of property usually during the foreclosure process, in which the lender(s) agrees to accept less than the balance due on the mortgage(s) or lien(s) in order to avoid the cost of foreclosure. Per HAFA requirements, the primary lender may not pursue the homeowner, but the secondary lenders do not have to agree to that provision. Assuming that they agree to the short sale in general, they can forego the financial incentive to waive collection rights and continue to pursue the homeowner for their own balances due, in which case their recovery options are then covered by state law. The vacancy date is determined by the terms of the closing. Unlike a short sale, a deed-in-lieu simply allows the homeowner in default to transfer the deed to the property back to the lender in exchange for partial or full payoff of the mortgage. The vacancy date must be at least 30 days after the deed-in-lieu agreement is signed. In either case, HAFA requires that the lender agree to suspend all foreclosure sale in good faith, pending the outcome of either transaction. In the case of a short sale, the lender also must agree to pay the administrative closing costs.

The Department of the Treasury, which authorizes all programs under the Making Home Affordable umbrella, has designated Freddie Mac as its compliance agent.

The HAFA program is set to begin on April 5, 2010. Servicers may initiate a HAFA transaction earlier in 2010 under certain conditions. As of this writing, all HAFA agreements must be finalized and signed by December 21, 2012.


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