Obama Guidelines Aim to Ease Short Sales

In an effort to assist financially troubled borrowers attempting to sell their home, the Obama administration has laid out guidelines designed to encourage the use of short sales allowing the borrower to sell their home for less than what is owed on the loan. In effect this program also makes it easier for borrowers to voluntarily transfer ownership of properties through a "deed in lieu of foreclosure."

The program’s official name is the Home Affordable Foreclosure Alternatives Program (HAFA), and its part of the existing Home Affordable Modification Program (HAMP). HAFA will apply to loans not owned or guaranteed by Fannie Mae or Freddie Mac, which cover over half of all U.S. mortgages; however, Fannie and Freddie will issue their own versions of HAFA in coming weeks.

This is the latest addition to the Obama administration's $75 billion foreclosure-prevention plan, which includes incentives for mortgage companies and investors to rework troubled loans. The government first said in May that it would include short sales in the program, but it has taken months to finalize the details.

Under this plan, if a home is sold for less than the amount of the mortgage the borrower will receive $1,500 and the Mortgage-servicing companies will receive $1,000 upon completion of the short sale. The program is open to borrowers who may be eligible for the government’s loan-modification program but don’t end up qualifying, or are delinquent on their modification, or request a short sale or deed-in-lieu transaction.

Also under these new guidelines, second-mortgage holders can receive up to $3,000 of the sales proceeds in exchange for releasing their liens. Investors who hold the first mortgages, meanwhile, can collect up to $1,000 from the government for allowing such payments.

Of Critical importance, borrowers who complete a short sale under the program must be "fully released" from future liability for the debt, according to the HAFA guidelines.

While the goal of the HAFA is to simplify the process in the hopes of increasing the number of short sales and “deeds in lieu of foreclosure” the rules can be a bit complex, and it comes with 43 pages of guidelines and forms. To review these guidelines and forms please click here.

This program will not take effect until April 5, 2010 but servicers may implement it before then if they meet certain requirements.