As the industry braces itself for recovery, the federal government continues to provide guidance through regulatory changes. One example is the December 2010 release of the Supplemental Directive 10-18 to the Making Home Affordable (MHA) program. The directive brings some welcome changes to the Home Affordable Foreclosure Alternatives (HAFA) program, which is offered to homeowners as an alternative to foreclosure. The question still remains: Are the changes substantial enough to increase the program's rather lackluster results thus far?
In 2009, the Obama administration introduced MHA to bring stability to the housing market and offer options to homeowners who were struggling, helping them avoid foreclosure. The Treasury Department subsequently issued uniform guidance for loan modifications. The latest directive, which went into effect Feb. 1, requires servicers to make appropriate updates that are consistent with investor guidelines, as well as describe the basis on which the servicer will offer HAFA to borrowers. Servicers are also required to evaluate and treat all borrowers consistently.
Although the new directive contains several changes, the most widely discussed modifications – and the ones that will have the most impact on the industry – include those that alter income verification requirements and payoff amounts for subordinate-lien holders.
For instance, the directive eliminates the requirement for servicers to verify a borrower's financial information or determine if the borrower's total monthly mortgage payment exceeds a 31% debt-to-income ratio.
This change has great potential to improve the results of HAFA, as it eliminates a requirement that bore no meaningful effect on the greater decision of whether a short sale is a better outcome for the investor, servicer and homeowners than is a real estate owned asset. As a result of this directive, servicers and outsourcers can process HAFA short sales in less time, and more homeowners will qualify.
Supplemental Directive 10-18 also eliminates the 6% cap on payment to junior-lien holders. Whereas servicers were previously required to limit the payment to junior-lien holders to 6% of the unpaid principal balance owed to them, up to $6,000, they are now limited only by the $6,000 cap.
At the inception of the HAFA program, this was one of the most debated requirements. Many mortgage industry professionals felt this limit would, in and of itself, prove to be detrimental to the success of the HAFA program, because it put a limit on the ability to negotiate the settlement amount of the junior lien. Although eliminating the percentage barrier is an improvement, the $6,000 cap will still preclude many opportunities to negotiate a successful short sale under the HAFA program.
Many second-lien holders are reluctant to settle for less than 10% of their unpaid principal balance, and considering the average amount of a typical second lien, $6,000 may still be too restrictive. For example, if there is a second lien for $100,000 on the property and the cap is $6,000, the $4,000 difference could mean the difference between the acceptance or rejection of a settlement.
Servicers must grant borrowers who request consideration for HAFA the same timeline as those who are approached by the bank. Borrowers who qualify for a short sale must receive a short-sale agreement no later than 30 days after the request.
One of the major complaints about the HAFA program has been the extended timeline to resolution. This is a positive change, as it sets the expectation for expediency in the process. Any effort to improve the timeline could improve the number of homeowners the program can help.
Some of the other, less-talked-about amendments covered in the directive that would also help the industry work more effectively with homeowners through this process include the following:
- Vacant property. This amendment clarifies that a homeowner who has moved from his or her property and has rented out the property for less than 12 months can be eligible for a short sale regardless of how far the borrower may have moved from the property. Another requirement is that the property had to have been originated as the homeowner's primary residence and not an investment property. This amendment will allow more homeowners to qualify for HAFA while maintaining the spirit of the rule that was meant to help homeowners, not investors.
- Alternative deed-in-lieu programs. Servicers can pay the relocation incentive to the homeowner at the close of the deed-in-lieu or at a future time when the borrower vacates or repurchases the property. This amendment gives servicers flexibility in deciding when to pay the incentive in order to create an outcome that is beneficial for the homeowner and the servicer. According to HAFA administrators, servicers that offer deed-for-lease programs (i.e., an option for borrowers to continue to occupy the property on a rental basis) must describe their programs and relevant conditions in their HAFA policy.
The directive also offers amendments regarding real estate brokerage commissions, borrower notices, retroactivity, reporting and compliance. A copy of the entire Supplemental Directive can be found at www.hmpadmin.com.
It is a fair assessment that the HAFA program is one of the factors that has created a greater interest in short sales as an alternative to foreclosure. What remains to be seen is whether the recent changes can make the program a significant contributor to short sales in 2011.
Stephen Sherman is chief operating officer of Green River Financial and Infinity Valuation Services, the two sister companies of REO asset management and loss mitigation provider Green River Capital LC. He can be reached at firstname.lastname@example.org.