As part of its foreclosure prevention efforts, the Obama Administration is launching a new program to encourage short sales and deed-in-lieu of foreclosure transactions for financially pressed homeowners who are unable to obtain loan modifications.

The Home Affordable Foreclosure Alternatives (HAFA) Program will provide borrowers, mortgage servicers and investors with financial incentives for allowing a short sale to proceed when efforts to obtain a loan modification have been unsuccessful. The program also seeks to simply the process by which a short sale or deed-in-lieu can be completed.

The incentives include a $1,500 payment to the homeowner to help cover relocation costs, a $1,000 payment to the mortgage servicer for allowing the transaction to go forward and up to $1,000 to investors holding the mortgage for allowing part of the proceeds to be paid out to second lien holders. Second lien holders would be entitled to a maximum of $3,000 from the sale for allowing the transaction to go forward.

The program, announced earlier this week by the Treasury Department, requires that a borrower giving up his or her home through the process be fully released from future obligations for the debt. It also prohibits the mortgage servicer from reducing a previously agreed-upon real estate commission as a condition of approving the sale.

To qualify, a homeowner must first be considered for a Home Affordable Loan Modification and be eligible for the program. The property must be the borrower's principle residence and the mortgage must either be delinquent or default is reasonably foreseeable.

The borrower must either have been turned down for a Home Affordable Loan Modification, failed to successfully complete the trial modification period or otherwise defaulted on a Home Affordable Program loan modification to be eligible.

The program is scheduled to being April 5, 2010, but mortgage servicers may begin authorizing short sales and deed-in-lieu transactions prior to that if they choose to do so.

A short sale is a foreclosure alternative where the lender allows a property to be sold for less than the remaining balance on the mortgage rather than allowing the property to go through the actual foreclosure process. The lender is able to avoid the administrative costs associated with a foreclosure and may be able to obtain a higher price than it might have been able to in a foreclosure sale. For the borrower, the transaction allows him or her to get out of a mortgage they can no longer afford with potentially less damage to their credit rating than an actual foreclosure.

A deed-in-lieu is similar, but the homeowner simply signs over the property to the lender without going through the foreclosure process in return for being freed of the debt.

Published on December 4, 2009