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Short Sale Negotiation

New York | Long Island Short Sale Law

        


Table of Contents

   • Short Sales: The Basics
      • What is a Short Sale?
      • Lender's Incentive
      • The Positives & Negatives
         • Privacy
         • Credit Implications/Bankruptcy
         • Post-Closing Financial Obligation
         • Timeframe
         • Proceeds
      • The Mortgage
      • The Property
      • Short Sales: The Roles of the Parties
         • The Attorney
         • The Real Estate Agent
         • The Homeowner
         • The Purchaser (Investors)
      • Real Estate Professionals


Short Sale Basics

What is a Short Sale?
For homeowners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a short sale. When lenders agree to a short sale in real estate, it means they are willing to release their lien against the home for less than the outstanding mortgage balance (including default interest and penalties, etc.). Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose.

As you may already be aware, this particular type of transaction requires an attorney with the patience and knowledge necessary to persevere in the continual, and sometimes frustrating, discussions with the lender.

At the Diamond Law Group, we have experience in negotiating short sales with numerous lending institutions. Our process is based on the wisdom gained in successfully closing countless short sale transactions thus rendering it efficient and reliable.


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Lender's Incentive

The incentive for the lender is to avoid foreclosing on the premises as this process is both time-consuming and expensive. On average the foreclosure process takes a year to complete. Over this period the lender will have to retain an attorney to repossess the property. As you can imagine there are many legal hurdles to overcome which can cost the lender tens of thousands of dollars depending how on vigorously the homeowner defends themselves in court. If the bank agrees to a short sale, this expense can be avoided in its entirety.

Further, if the homeowner is not making their mortgage payment, nothing is being contributed into their escrow account. The escrow account is used to pay the homeowner's real estate taxes as well as their homeowner's insurance. Taxes and insurance must be kept current in order for the lender to protect its collateral. Therefore the bank is forced to carry the cost of the home from the time of default through the date of repossession or resale. The lender can save a substantial amount of money by agreeing to a short sale as opposed to foreclosing and carrying the expense of the home.

Frequently we are asked what the average percentage a lender will reduce the outstanding principal when considering a short sale offer. The answer is it does not matter whatsoever! It may initially seem counterintuitive; however, it is a reality.

When deciding whether to accept a short sale the lender will compare the current offer to the alternative: simply letting the home go to foreclosure. At a foreclosure auction potential bidders will take the "fair market value" into consideration; not the outstanding principal balance owed by the homeowner.

The short sale lender is aware of this fact and will apply the same principle to the offer that is presented. As long as the offer reflects the current appraised value the lender will ignore how much of a cut the deficiency is because that is what will happen at a foreclosure sale!


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The Positives & Negatives

It is important to understand that most short sale candidates have not done anything wrong. Typically a short sale homeowner purchased the property within the last three years and financed a high percentage of the purchase price and perhaps closing costs, if not all (i.e. 100% financing with a seller's concession). Since that time prices have dropped significantly in value which means that if the homeowner wanted to sell or refinance they would have make up the difference between the mortgage balance and the current decreased value, plus closing costs.

There is also the possibility that the homeowner may not have understood the terms of the mortgage or was fraudulently induced into predatory subprime loans.

Whatever the reason the homeowner is in the situation they are in, it is crucial to appreciate that foreclosure should be avoided at all costs and there is always an opportunity to rebuild both your finances and overall quality of life.


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Privacy

A short sale is the lesser of two evils. Inevitably, if the homeowner cannot afford to remain in premises, the lender will repossess the property through foreclosure proceedings. A short sale can save the homeowner many months of stress, embarrassment, aggravation and uncertainty.

When considering whether to undertake a New York short sale, it is very important to make sure that the seller understands the benefits when compared to foreclosure.

One advantage to a short sale is that it is a private proceeding; unlike a foreclosure which is public in nature.

A financially distressed homeowner will receive literally 4 inches of mail on a daily basis from investors who are attempting to convince the homeowner that it is in their best interest to sell to them. Some of these solicitations are skillfully crafted to look like actual legal documents which may confuse and frustrate the homeowner. With a short sale this aggravation can all be avoided as the parties who are aware of the transaction are limited to those intimately involved.

This is not to mention the daily phone calls from the bank inquiring as to why the homeowner is missing their payments. Often the bank will attempt to reach the homeowner at work where they will initiate conversation with anyone who answers the phone, including the homeowner's coworkers or boss! Remember, they are attempting to collect hundreds of thousands of dollars and will use anything within their power to reach that goal.

In a short sale transaction this nuisance can all be avoided as the homeowner should instruct the lender to contact the attorney they have retained who is intimately involved in the transaction and familiar with all relevant facts. The lawyer in this scenario acts as a shelter or buffer between the persistent lender and distraught client.


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Credit Implications/Bankruptcy

Obviously late payments can be devastating upon your credit score. By the time the foreclosure process ends a homeowner may have missed a year's worth of payments, if not more.

By successfully negotiating a short sale, homeowners can salvage as much of their credit score as possible. Yes it is true that the lender will reserve the right to report this transaction to the appropriate credit bureaus which may negatively affect the homeowner's credit. However, as previously stated, the blemish caused by a short sale pales in comparison to the destruction of a completed foreclosure.

Commonly clients are concerned about the timeframe necessary to rehabilitate their credit so as to qualify for a conventional mortgage in the future. The only reliable data we can gather has been based upon the information provided by our prior clients; credit may be restored in as little as eighteen months. The only guarantee is that however long the timeframe may be, it is certainly less than it would have been had the foreclosure action concluded. Contrary to what the lenders will tell you, the homeowner does not need to be in default in order to be considered for a short sale! The reason the bank will tell you this is because they want you to try to make as many payments as possible. We have closed many transactions where the homeowner never missed one payment. This is the best way to preserve as much of your credit score as possible.

Finally, with respect to bankruptcy, it has been our experience that some clients have declared bankruptcy as a last resort, unaware of an alternative. If you believe that bankruptcy is in your best interest, we strongly suggest completing our Short Sale Worksheet so that you can make an educated decision as to your best course of action.


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Post-Closing Financial Obligation

Generally clients are concerned about the potential liability to repay the difference between the amount owed and the amount received by the lender as part of the short sale. This amount is known as a deficiency.

The most common result of a short sale for the homeowner is that the lender can file a 1099-C ("Cancellation of Debt Form") which may subject the homeowner to tax liability. The I.R.S. in turn will consider the debt forgiveness as income. However, recent legislation, known as the Mortgage Forgiveness Debt Relief Act of 2007, allows the homeowner to exclude the "income" if they qualify by filing Form 982 ("Reduction of Tax Attributes Due to Discharge of Indebtedness") (see referenced websites for more information).

Very rarely will the lender consider the Promissory Note to be in full force and effect after the closing. Because the outcome of the short sale is unknown when entering into a Contract with the purchaser, we reserve the right for the seller to cancel the transaction at any time. Therefore, in the unlikely event that the lender does pursue the deficiency, or "go after" other assets, the homeowner has the absolute right not to consent and rescind the Contract.


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Timeframe

From the time a Contract is entered into to sell the home, the process should take no longer than 3 months. However, we have been known to negotiate short sales in as little as 2 to 3 weeks. All transactions are reviewed on a case-by-case basis so as to better advise the homeowner what can expected.

It is very important to understand that the only time a lender will stop foreclosure proceedings is after a successful short sale negotiation. In other words, the lender will continue their efforts to repossess the home despite the fact that a homeowner has listed the home for sale or entered into a contract to negotiate a short sale. Again, it is only after the transaction has closed that the lender will abandon the foreclosure action.


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Proceeds

Homeowner's are forbidden from receiving any proceeds from the sale of their home. Keep in mind that as an incentive for the lender to accept less than what they are owed, they will mandate the defaulting homeowner not receive any money whatsoever, without exception.


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The Mortgage

In addition to completing our Short Sale Worksheet, please review the following information for your particular lender(s):

  • American Home Mortgage Servicing, Inc. (AHMS)
  • America’s Servicing Company (ASC)
  • Aurora Loan Services
  • Avelo Mortgage LLC
  • Bank of America (BoA)
  • Beneficial
  • Capital One Bank
  • Carrington Mortgage Services, LLC (CMS)
  • Chase Mortgage
  • Chevy Chase Bank
  • CitiBank
  • Commerce Bank
  • Countrywide Financial
  • EMC Mortgage Corp.
  • First Franklin Loan Services
  • Flagstar Bank
  • Fremont Investment
  • GMAC Mortgage LLC
  • Homecomings Financial LLC
  • HomEq Servicing
  • HSBC Mortgage Corp. (USA)
  • Indymac Federal Bank
  • Loan Litton Loan Servicing LP
  • MoreEquity
  • National City Mortgage
  • Nationstar Mortgage
  • OCWEN Financial Corp.
  • One West Bank
  • Option One Mortgage Corp.
  • Saxon Mortgage Services, Inc.
  • Select Portfolio Servicing, Inc. (SPS)
  • SN Servicing Corporation
  • SunTrust Banks, Inc.
  • TD Bank Mortgage
  • US Bank
  • Wachovia/World Savings
  • Washington Mutual (WAMU)
  • Wells Fargo Home Mortgage
  • Wilshire Credit Corporation

  • When reviewing a short sale, the lender will consider the year of purchase or refinance, as well as the type of loan (fixed, ARM, etc.).

    Contrary to what most lenders will advise, you do not need to be in default of your mortgage to qualify for a short sale. Banks will notify homeowners that they need to default on their mortgage for 2 or 3 months before they will be eligible for a short sale. This simply is not true. In fact, the best way to preserve your credit rating is to negotiate a short sale having never defaulted on a monthly payment.

    However, most clients research short sales once foreclosure proceedings have been commenced and they have been served with a Lis Pendens. In general, until the auction date has been set, there is still time to negotiate a short sale.

    Finally, it is vital that any outstanding judgments or tax arrears be brought to our attention as these costs must be reflected in the offer to the short sale lender. Often judgments or liens can be negotiated lower as well provided there is enough time to do so.


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    The Property

    We have successfully negotiated shorts sales across New York and Long Island including Nassau county, Suffolk county, Brooklyn, and Queens.

    Besides the location, another factor which must be addressed is the condition of the house. In particular, it must be determined if the plumbing, heating and air conditioning, electrical systems and appliances are in working order. If not, these items should be brought the prospective purchaser's attention immediately. This will ensure that their offer accurately reflects the premises "as is" and that an appraisal will be able to be conducted, if necessary.

    Other concerns include termite infestation or damage and Certificate of Occupancy issues. If either of these issues exists, they must be brought to our attention immediately. It is possible for the lender to pay for these problems provided there is enough time to do so.

    Finally, some short sales are for investment properties as opposed to principal residences. For instance your tenant defaulted on their rent which was in turn being used to subsidize the monthly mortgage payment. It is possible for short sales to be negotiated for investment properties; however, the lender is more likely to pursue a deficiency judgment because the circumstances surrounding the default are more of a business hardship instead of one personal in nature.

    Keep in mind that even if the lender does pursue the deficiency there is room for negotiation (balance, rate, term, etc.) which is not the case with the alternative; foreclosure.


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    Short Sales: The Roles of the Parties

    The Attorney

    When should an attorney get involved and what is the fee? A qualified attorney should be involved in the transaction immediately! On a daily basis we receive numerous calls from potential clients who have spent a lot of time and energy attempting to negotiate with the bank directly only to become frustrated with the process.

    There is no consultation fee whatsoever; we'd be more than happy to review your case in order to ensure you are headed in the right direction. Simply complete our Short Sale Worksheet and fax, mail or e-mail a copy to our office. Someone will respond back to your inquiry shortly thereafter.

    Should our firm be retained, there is no transaction fee whatsoever; the lender will pay our entire fee! In no event, will this firm seek reimbursement from you should the lender reduce our legal fee less than what we feel is appropriate taking into consideration the time and effort expended.

    The short sale process cannot begin until an executed Contract has been submitted to the lender. Contrary to what others might say, there must be an accepted offer which is then turned into a formal Contract along with a downpayment held in escrow. It is important to understand that the lender will continue to foreclose until the short sale closing takes place.

    It is your attorney's job to draft and review the Contract to ensure that your rights are protected. The Contract should contain a contingency that if the terms of the short sale are unacceptable to the seller, the Contract can be canceled at any time for any reason.

    There can only be one Contract executed at the same time. The Contract is a legally binding document which will contain a short sale contingency similar to the standard "buyer financing contingency". That is to say, the Contract is "subject to" the short sale lender's consent. If they fail to do so, the transaction is rescinded and the downpayment is returned to the purchaser.

    If you were to contact the lender directly, they will suggest the real estate agent gather as many offers as possible within 2 weeks and then submit all offers to them. This does not have to happen provided you submit an offer that represents today's "fair market value". In fact, to date, we've never submitted multiple offers to the lender; only 1 which reflects a reasonable purchase price.

    Obviously their incentive to suggest the real estate agent solicit multiple offers is to ensure they get the best offer possible; i.e. the highest offer. Typically, "all cash" offers are not as impressive as the bottom line proceeds they will receive at the end of the day. However, as previously stated, a realistic offer is all you need to proceed with a short sale.

    Please recall who negotiates real estate in the rest of the country; real estate agents. Here in New York, attorneys are responsible for closing the transaction. Therefore, most members of the loss mitigation department are influenced to some degree by the fact that they are speaking with an attorney.

    Lastly, the phone hold times to contact the short sale lender average around ten minutes. Further, the status of the short sale must be checked on a daily basis, otherwise the process will be delayed substantially. Remember that the loss mitigation departments are overworked and predictably can only work on the files that they receive calls on. That is why at the Diamond Law Group, we call every single lender every single day regarding approximately a dozen files each. This gives us a time effective approach towards resolving our clients' transaction in a timely fashion as well as increased bargaining power.


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    The Real Estate Agent

    The real estate agent has a very important role in the short sale process. They are responsible for listing the home; however, they must do so in a particular way so as to inform all parties as to the nature of this transaction.

    In other words, if prospective purchasers are not initially advised that the transaction is a short sale they may become unnecessarily frightened and shy away from making an offer. Alternatively, if the purchasers are educated as to what a short sale entails from the beginning all concerns may be properly addressed.

    The real estate agent must also ensure that the potential purchaser is capable of securing a mortgage. Lending guidelines have become increasing stricter; without a qualified purchaser, the transaction will not go through.

    Additionally, the role of the real estate agent is especially important when it comes to realistically listing the home. An overpriced home in a market with flooded inventory can be devastating in receiving timely offers. The short sale process cannot begin until an executed Contract has been submitted to the lender therefore time is of the essence for the qualified real estate agent to solicit a legitimate offer.

    Most clients want to know what the average percentage a short sale lender will reduce the outstanding principal when considering a Short Sale offer. The answer is it does not matter whatsoever! It may initially seem counterintuitive; however, this is the reason why it is a reality.

    When deciding whether to accept a short sale offer the lender will compare the offer to the alternative: simply letting the home go to foreclosure. At a foreclosure auction potential bidders will take the "fair market value" into consideration; not the outstanding principal balance owed by the homeowner.

    The short sale lender is aware of this fact and will apply the same principle to the offer that is presented. As long as the offer reflects the current appraised value the lender will ignore how much of a cut the deficiency is because that is what will happen at a foreclosure sale!

    The real estate agent will prepare a Comparative Market Analysis which will show prices of similar homes. This is necessary in order to substantiate offer which has been submitted to the foreclosing bank.

    The lender will also send out their own independent appraiser to verify whether the submitted offer is reasonable. At this time the real estate agent should present the engineer's inspection along with written estimates for any repairs to the appraiser to further validate the offer.

    Best of all, similar to attorney's fees, the lender will also pay for the entire real estate commission.


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    The Homeowner

    Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give the homeowner a pretty good idea of what to expect:

    Last Statement for All Loans: This is necessary so that we may verify the amount necessary to payoff the loan. If the homeowner has defaulted for an extended period of time the payoff must reflect all default interest, penalties, attorney's fees and escrow deficiencies.
    Hardship Letter: This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized, etc.
    Proof of Income and Assets:
       •2 Weeks Paystubs: If you are unemployed, a simple letter explaining your circumstances will be sufficient.
       •2 Months Bank Statements: Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
       •Last Year's Tax Returns: If you did not file taxes last year, a simple letter explaining your circumstances will be sufficient.

    Unfortunately financial issues sometimes lead to marital issues. If the homeowner's are in the process of filing for divorce this fact must be disclosed immediately. We want to ensure all parties feel that their rights are being protected; therefore we would be more than happy to send a copy of all correspondences to each spouse's attorney for their review.


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    The Purchaser (Investors)

    If you are considering purchasing a short sale, there are some inherent risks which must be taken into consideration. Our information is based on the experience gained in successfully closing countless short sale transactions thus rendering it efficient and reliable.

    First, it is important to understand that the purchaser is "subject to" the lender's consent of the offer. Typically, the offer must reflect today's "fair market value". Consequently "all cash" offers are not as impressive as the bottom line proceeds the foreclosing bank will receive at the end of the day.

    Further, the vast majority of the time, the lender will not entertain a "seller's concession" where the purchaser inflates the purchase price in order to assist financing the closing costs. From the prospective of the short sale lender, who is losing tens of thousands of dollars, the purchaser is admitting that the property is worth more than they are paying for it (as the buyer's own lender must receive a satisfactory appraisal reflecting the purchase price plus seller's concession). Moreover your attorney must thoroughly review the Home Equity Theft Prevention Act to ensure that the transaction is insurable.

    Additionally, the timeframe necessary to complete the transaction must be contemplated. For instance, the buyer must make a wise decision when deciding whether or not to lock the mortgage rate.

    Also, it is your attorney's job to draft and review the Contract to ensure that your rights are protected. The Contract should contain a contingency that if the short sale is not successfully negotiated within a certain timeframe (usually 60 days) that the Contract can be cancelled by the purchaser at any time for any reason with the entire downpayment being returned to the purchaser.

    Finally, there is no reason to put down a large downpayment for an indefinite amount of time. Your attorney should be able to negotiate a reasonable downpayment allowing you to retain your money where it can potentially earn interest.

    If you or one of your clients is considering purchasing a short sale, please Contact Us without delay so that we may thoroughly review your transaction.


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    Dear Valued Real Estate Professional,

    At the Diamond Law Group, we have experience in negotiating short sales with numerous lending institutions. If you are considering a short sale, please complete our Short Sale Worksheet without delay as earlier communications with the lender increase the likelihood of a successful negotiation.

    As you may already be aware, this particular type of transaction requires an attorney with the patience and knowledge necessary to persevere in the continual, and sometimes frustrating, discussions with the lender.

    On a weekly basis we give educational lectures thoroughly reviewing the short sale process. Afterwards you will have the tools necessary to speed up the transaction by avoiding common pitfalls as well as the knowledge to both motivate your clients and maximize your commissions.

    Our information is based on the experience gained in successfully closing countless short sale transactions thus rendering it efficient and reliable.

    If you are interested in expediting the short sale process as well as preserving your full 6% commission, we suggest you Contact Us immediately so that we may arrange a free "lunch and learn" lecture for your company in your office.

    When should an attorney get involved and what is the fee?

    A qualified attorney should be involved in the transaction immediately! On a daily basis we receive numerous Sales Agreements from real estate agents who have spent a lot of time and money on their listing only to become frustrated when we inform them that the transaction cannot be negotiated!

    Wouldn't it be nice to find out if the deal will go through before you even take a listing and spend your precious time and hard earned money?

    Now you can, by referring the client to this firm. The reason you hear horror stories of Short Sales taking forever only to have your commission cut is because the real estate agent failed to qualify the transaction through an experienced attorney.

    Do not end up like one of the daily agents we speak to who has wasted their time and money on a hopeless sale!

    There is no consultation fee whatsoever; we'll speak to whomever you'd like in order to ensure you concentrate your effort towards worthy endeavors.

    What will happen to the defaulting homeowner's credit and will they be responsible for the deficiency? How long does the process take?

    The reason most real estate agents want to know the answer to these questions is so they can better advise their clients. You should not be answering these questions!

    The questions above are best answered by an attorney who answers these questions on a daily basis! You do not want to make any representations whatsoever unless they're 100% accurate; the last thing you want is for your clients to mistakenly hold you accountable after the closing due to something they misunderstood.

    At the Diamond Law Group we make your job as easy as possible by asking you do one thing: sell the home as close to the "fair market value" as possible. That's it. Do not answer any legal questions asked by your clients. Simply refer them to this firm and we will handle everything.

    What is the average percentage a Short Sale lender will reduce the outstanding principal when considering a Short Sale offer?

    The answer is it does not matter whatsoever! It may initially seem counterintuitive; however, this is the reason why it is a reality.

    When deciding whether to accept a short sale offer the lender will compare the offer to the alternative: simply letting the home go to foreclosure.

    At a foreclosure auction potential bidders will take the "fair market value" into consideration; not the outstanding principal balance owed by the defaulting homeowner.

    The short sale lender is aware of this fact and will apply the same principle to the offer that is presented. As long as the offer reflects the current appraised value the lender will ignore how much of a cut the deficiency is because that is what will happen at a foreclosure sale!


    HAFA


    How HAFA Can Help

    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 incentives for servicers to allow short sales or deeds-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).

    When a borrower applies for help from HAMP, not everyone succeeds with the program. Sometimes their lender is unable to approve a loan modification. Other times the borrower declines the terms of the loan modification. Some borrowers are approved and accept the terms of the modification, but fail to complete the program for various reasons. Before HAFA, these borrowers were usually headed for foreclosure.

    HAFA gives those borrowers a viable alternative to foreclosure. If they have or want to find a buyer for their home, they may request approval for a short sale with pre-approval short sale terms and minimum acceptable net proceeds. If not, they may request approval for a deed-in-lieu.

    General Terms and Conditions

    Short sales are complex transactions involving coordination and cooperation among a number of parties including, but not limited to, servicers, appraisers, borrowers (sellers), buyers, real estate brokers and agents, title agencies, and often mortgage insurance companies and subordinate and other lien holders. The HAFA program simplifies and streamlines the use of short sales by incorporating the following unique features:

    · Release of Mortgage Lien. Requires that borrowers be fully released from future liability for the debt (no cash contribution, promissory note, or deficiency judgment is allowed). The amount of debt forgiven might be treated as income for tax purposes. Under a law expiring at the end of 2012, however, forgiven debt will not be taxed if the amount does not exceed the debt that was used for acquisition, construction, or rehabilitation of a principal residence. Check with a tax advisor or the IRS.

    · Borrower Relocation Assistance. Following the successful closing of a short sale or DIL, the borrower shall be entitled to an incentive payment between $1,500. and $3,000. to assist with relocation expenses. The servicer must instruct the settlement agent to pay the borrower from sale proceeds at the same time that all other payments, including the payoff to the servicer, are disbursed by the settlement agent. The amount paid to the borrower must appear on the HUD-1 Settlement Statement.

    · Credit Bureau Reporting. The servicer will report to the credit reporting agencies that the mortgage was settled for less than full payment, which may hurt credit scores. The servicer should continue to report a “full file” status to the major credit repositories for each loan under the HAFA program in accordance with the Fair Credit Reporting Act and the Consumer Data Industry Association’s (“CDIA’s”) Metro 2 Format credit bureau requirements. “Full file” reporting means that the servicer must describe the exact status of each mortgage it is servicing as of the last business day of each month. The Payment Rating code should be the code that properly identifies whether the account is current or past due within the activity period being reported – prior to completion of the HAFA transaction. Because CDIA’s Metro 2 format does not provide an Account Status Code allowable value for a short sale, a short sale should identified with the reporting of Special Comment Code “AU”. The information below is consistent with “CDIA Mortgage and Home Equity Reporting Guidelines in Response to Current Financial Conditions” (May 2009).

    · Suspension of Foreclosure Sales. At the servicer’s discretion, the servicer may initiate foreclosure or continue with an existing foreclosure proceeding during the HAFA process, but may not complete a foreclosure sale:

    o While determining borrower’s eligibility and qualification for HAMP or HAFA.

    o While awaiting the return of the Short Sale Agreement by the 14 day deadline.

    o During the term of a fully executed Short Sale Agreement (while the borrower seeks to sell).

    o Pending the transfer of ownership based on an approved sales contract per the RASS or Alternative RASS.

    o Pending transfer of ownership via a DIL by the date specified in the SSA or DIL Agreement.

    Determination of Eligibility and Notification

    Who is my “servicer?" Is my servicer the same as my lender or investor?
    Your loan servicer is the financial institution that collects your monthly mortgage payments and has responsibility for the management and accounting of your loan. It is possible that the owner of your mortgage also services it, however many loans are owned by groups of investors and these investors hire loan servicers to interact with homeowners on their behalf. Many lenders also have the loan servicers handle all contact with homeowners.

    Traditionally, banks used money deposited in customers' savings accounts to make loans. They held the loans, earning the interest as homeowners repaid over time. Banks were thus limited in the number of loans they could make because they had to wait to make new ones until savings deposits grew or existing homeowners repaid their loans. Many families who wanted to own a home were unable to do so because there was not a steady supply of money for banks to lend.

    Over time, banks started to turn loans into cash by pooling large groups of loans together to create mortgage backed securities that could be sold to investors such as pension funds and hedge funds. The investors get the right to collect future payments and the bank gets cash that it can use to make more loans. Investors hire loan servicers to collect payments and interact with customers.

    If you have questions about your loan, or you are behind on your payments, you should call your loan servicer at the number on your payment coupon or monthly mortgage statement.

    1. Is my servicer participating in MHA?
      All servicers for loans owned or guaranteed by Fannie Mae and Freddie Mac are required to participate. Additional servicers are strongly encouraged to participate. The list of servicer participants will be updated at(See “How do I know if my loan is owned or has been guaranteed by Fannie Mae or Freddie Mac?”)

    What should I do if my servicer tells me that the investor is not participating in the Making Home Affordable Program?
    Check to see if your servicer is listed on our servicer participant list at http://www.makinghomeaffordable.com/contact_servicer.html. Keep in mind that all servicers for loans owned or guaranteed by Fannie Mae and Freddie Mac are required to participate with respect to those loans. (See “How do I know if my loan is owned or has been guaranteed by Fannie Mae or Freddie Mac?”)

    If your servicer is on our participant list, or your mortgage is owned or guaranteed by Freddie Mac or Fannie Mae, call your servicer back and ask to speak to a supervisor. You may also contact a HUD-approved housing counselor for assistance.

    If your servicer is not participating in the Program, ask your servicer or a housing counselor about other options that may be available.

    Who is eligible for HAFA? The borrower must meet the basic eligibility criteria for HAMP:

    • Principal residence.
    • The property may be vacant up to 90 days before the date of the Short Sale Agreement (SAA), Alternative Request for Approval of Short Sale, or DIL but only if the borrower documents they were required to relocate at least 100 miles from their home for purposes of employment and they have not purchased another property in the 90 day period.
    • First lien originated before 2009
    • Mortgage delinquent or default is reasonably foreseeable
    • Unpaid principal balance no more than $729,750 (higher limits for two- to four-unit dwellings)
    • Borrower’s total monthly payment exceeds 31% of gross income

    Borrower Solicitation and Response. Servicers must consider HAMP-eligible borrowers for HAFA within 30 days after the borrower does at least one of the following:

    · Does not qualify for a HAMP trial period plan

    · Does not successfully complete a HAMP trial period plan

    · Is delinquent on a HAMP modification (misses at least 2 consecutive payments)

    · Requests a short sale or DIL

    If the servicer has not already discussed a short sale or DIL with the borrower, the servicer must proactively notify the borrower in writing of the availability of these options and allow the borrower 14 calendar days from the date of the notification to contact the servicer by verbal or written communication and request consideration under HAFA. If the borrower fails to contact the servicer within the timeframe or at any time indicates that he or she is not interested in these options, the servicer has no further obligation to extend a HAFA offer.

    Assess expected recovery through foreclosure and disposition compared to a HAFA short sale or deed in lieu of foreclosure (DIL)

    All servicers participating in HAMP must also implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include such factors as the severity of the loss involved, local market conditions, the timing of pending foreclosure actions, and borrower motivation and cooperation.

    Though not a HAFA requirement, it is expected that servicers will, in accordance with investor guidelines, perform a financial analysis to determine if a short sale or DIL is in the best interest of the investor, guarantor and/or mortgage insurer. The results of any analysis must be retained in the servicing file.

    Use of borrower financial information from HAMP

    Verified borrower financial information obtained in conjunction with HAMP may be relied upon to determine a borrower’s eligibility for HAFA. If financial and hardship information is documented and verified, no additional financial or hardship assessment is required by HAFA. However, in accordance with investor guidelines, the servicer may request updated financial information to evaluate the borrower. If a borrower was evaluated for HAMP based on verbal financial data, the servicer may send the borrower a Short Sale Agreement (SSA) and must require the borrower to deliver the financial information required under HAMP when the borrower returns the executed SSA. The servicer must verify a borrower’s financial information through documentation and obtain a signed Hardship Affidavit prior to approving a short sale or accepting a DIL under HAFA.

    Property valuation

    The servicer must, independent of the borrower and any other parties to the transaction, assess the current value of the property in accordance with the investor’s guidelines. The servicer may not require the borrower to pay in advance for the valuation, but may add the cost to the outstanding debt in accordance with the borrower’s mortgage documents

    and applicable law in the event the short sale or DIL is not completed.

    Review of title

    The servicer must review readily available information provided by the borrower, the borrower’s credit report, the loan file or other sources to identify subordinate liens and other claims on title to determine if the borrower will be able to deliver clear, marketable title to a prospective purchaser or the investor. Although not required by HAFA, the servicer may order a title search or preliminary title report. The servicer may not charge the borrower in advance for any cost incurred in the title review, but may add the cost to the outstanding debt in accordance with the borrower’s mortgage documents and applicable law in the event the short sale or DIL is not completed.

    Borrower notice if short sale or DIL not available (to borrowers that have expressed interest in HAFA): Short Sale Agreement

    Short Sale Agreement (SSA).

    Either proactively, or at the request of an eligible borrower, the servicer will prepare and send an SSA to the borrower after determining the borrower is interested in a short sale, the property qualifies and that the proposed sale is in the best interest of the investor. A borrower may not participate in a HAMP Trial Period Plan and agree to a HAFA SSA simultaneously.

    It outlines the roles and responsibilities of the servicer and borrower in the short sale listing process and provides key marketing terms, such as a list price or acceptable sale proceeds and the duration of the SSA. The borrower has 14 calendar days from the date of the Short Sale Agreement (SSA) to sign and return it to the servicer. If the borrower does not respond, that ends the servicer’s duty to give a HAFA offer. The SSA must give the borrower a fixed termination date not less than 120 calendar days from the effective date of the SSA (“Effective Date”). The Effective Date must be stated in the SSA and is the date the SSA is mailed to the borrower. The term of the SSA may be extended at the discretion of the servicer up to a total term of 12 months if agreed to by the borrower, in accordance with the requirements of the investor.

    Minimum Acceptable Net Proceeds. Prior to approving a borrower to participate in a HAFA short sale, the servicer must determine the minimum acceptable net proceeds (minimum net) that the investor will accept from the transaction. Each servicer must develop a written policy, consistent with investor guidelines, that describes the basis on which the minimum net will be determined. However, the minimum net proceeds must be at least equal to or less than the list price minus the sum of allowable costs that may be deducted from gross sale proceeds (or the acceptable sale proceeds). This policy may incorporate such factors as local market conditions, customary transactional costs of such sales, and the amounts that may be required to release any subordinate liens on the property. A servicer’s policy for determining the minimum net must be consistently applied for all loans serviced for that investor. The minimum net may be expressed as a fixed dollar amount, as a percentage of the current market value of the property, or as a percentage of the list price as approved by the servicer. Once determined, the servicer must document the minimum net in the servicing file for each property subject to HAFA. After signing an SSA, the servicer may not increase the minimum net requirement until the initial SSA termination date is reached (not less than 120 calendar days). Subsequent changes to the minimum net when the SSA is extended must be documented.

    The property be listed with a licensed real estate professional who is regularly doing business in the community where the property is located.

    Payment Forbearance. The servicer will identify in the SSA, Alternative RASS or DIL

    Agreement the amount of the monthly mortgage payment, if any, that the borrower is required to make during the term of the applicable agreement and pending transfer of property ownership, as applicable. In no event may the amount of the borrower’s monthly payment exceed the equivalent of 31 percent of the borrower’s gross monthly income. Servicers must develop a written policy in accordance with investor requirements that identifies the circumstances under which they will require monthly payments and how that payment will be determined. Any requirement for the borrower to make monthly payments must be in accordance with applicable laws, rules and regulations.

    Allowable Transaction Costs. In determining the minimum net, the servicer must consider reasonable and customary real estate transaction costs for the community in which the property is located and determine which of these costs the servicer or investor is willing to pay from sale proceeds. The servicer must describe the costs that may be deducted from the gross sale proceeds in the SSA.

    • Real Estate Agent Obligations
    • Borrower Obligations.
    • Purchase Offer
    • Request for Approval of Short Sale & Alternative Request for Approval of Short Sale.
    • Servicer Approval
    • Closing and Lien Release

    Servicers may not charge the borrower any administrative processing fees in connection with HAFA. The servicer must pay all out-of-pocket expenses, including but not limited to notary fees, recordation fees, release fees, title costs, property valuation fees, credit report fees, or other allowable and documented expenses, but the servicer may add these costs to the outstanding debt in accordance with borrower’s mortgage documents and applicable laws in the event the short sale or DIL is not completed. Servicers may require borrowers to waive reimbursement of any remaining escrow, buy down funds or prepaid items, and assign any insurance proceeds to the investor, if applicable. Those funds will not be applied to reduce the total net proceeds from the sale.

    When a HAFA short sale or DIL is not available, the servicer must communicate this decision in writing to any borrower that requested consideration. The notice must explain why a short sale or DIL under HAFA cannot be offered, provide a toll free telephone number that the customer may call to discuss the decision and otherwise comply with the notice requirements of Supplemental Directive 09-08, Borrower Notices.

    SAMPLE SHORT SALE AGREEMENT (SSA)

    1. List Price or Acceptable Sale Proceeds. [Choose one and delete unnecessary text.] [You agree to list the property in “as is” condition for [dollar amount].] OR [We will accept a sales contract where the proceeds from the sale, less the expenses stated in paragraph 5. Allowable Costs, nets [dollar amount].] We are not responsible for the accuracy of the list price and have no responsibility to you in the event the property is not sold. We may require you to adjust the list price or other offer terms.
    2. Listing Agreement. The listing agreement must include the following clauses:
      1. Cancellation Clause. “Seller may cancel this Agreement prior to the ending date of the listing period without advance notice to the broker, and without payment of a commission or any other consideration, if the property is conveyed to the mortgage insurer or the mortgage holder.”
      2. Listing Agreement Contingency Clause. “Sale of the property is contingent on written agreement to all sale terms by the mortgage holder and the mortgage insurer (if applicable).”
    3. Property Maintenance and Expenses. You are responsible for all property maintenance and expenses during the listing period including utilities, assessments, association dues and costs for interior and exterior upkeep required to show the property to its best advantage. Additionally, until ownership is transferred, you must report any and all property damage to us and file a hazard insurance claim for covered damage. Unless insurance proceeds are used to pay for repairs or personal property losses as provided in the mortgage documents, we may require that they be applied to reduce the mortgage debt.
    4. [Insert only if applicable:] Partial Mortgage Payments. Beginning on ___________ 1, 20___, you will be required to make partial mortgage payments of $_________ by the first day of each month during the term of the Agreement and pending transfer of property ownership. You are legally obligated to make the full amount of your current monthly mortgage payments. However, we will accept this reduced partial payment until the house is sold or this Agreement expires. The partial mortgage payments do not constitute a modification of your mortgage.
    5. Allowable Costs that May be Deducted from Gross Sale Proceeds
      1. Closing Costs. The closing costs paid by you or on your behalf as seller must be reasonable and customary for the market. [Choose one and delete unnecessary text.] [Acceptable closing costs, including the commission, which may be deducted from the gross sale proceeds may not exceed $__________.] OR [Acceptable closing costs, including the commission, which may be deducted from the gross sale proceeds may not exceed ____% of the list price.] OR [Closing costs which may be deducted from the gross sale proceeds are limited to title search and escrow expenses usually paid by the seller; reasonable settlement escrow/attorney’s fees; transfer taxes and recording fees usually paid by the seller; termite inspection and treatment as required by law or custom; pro-rated real property taxes; and, real estate commissions of ____ percent of the contract sales price [add other closing costs that may be included].]
      2. Subordinate Liens. We will allow up to six percent (6%) of the unpaid principal balance of each subordinate lien in order of priority, not to exceed a total of $6,000, to be deducted from the gross sale proceeds to pay subordinate lien holders to release their liens. We require each subordinate lien holder to release you from personal liability for the loans in order for the sale to qualify for this program, but we do not take any responsibility for ensuring that the lien holders do not seek to enforce personal liability against you. Therefore, we recommend that you take steps to satisfy yourself that the subordinate lien holders release you from personal liability.
      3. Real Estate Commissions. We will allow to be paid from sale proceeds, real estate commissions of _____ percent of the contract sales price, to be paid to the listing and selling brokers involved in the transaction. Neither you nor the buyer may receive a commission. Any commission that would otherwise be paid to you or the buyer must be reduced from the commission due on sale. [Optional text:] Please note: We have retained a vendor to assist your listing broker with the sale. The vendor and your listing broker will work together on your behalf to facilitate the sale process. [Choose one and delete unnecessary text.] [The vendor will be paid from sale proceeds [$ ________] OR [an amount equal to ____% of the sales price].] OR [The vendor will be paid by us outside of the sales transaction.]
      4. Borrower Relocation Assistance. If the closing of the short sale occurs in accordance with this Agreement, you will be entitled to an incentive payment of $3,000 to assist with relocation expenses. We will instruct the settlement agent to pay you from the sale proceeds at the same time that all other payments, including the payoff of our first mortgage, are disbursed by the settlement agent. Only one payment per household is provided for the relocation assistance, regardless of the number of borrowers.
    6. Sales Contracts. Within three business days of a bona-fide purchase offer, you must submit a Request for Approval of a Short Sale, which is attached as Exhibit A1, along with a copy of a fully executed Sales Contract, all addenda and Buyer’s documentation of funds or Buyer’s pre-approval or commitment letter on letterhead from a lender.
    7. Parties to the Sale. The Sales Contract must contain the following clauses: “Seller and Buyer each represent that the sale is an “arm’s length” transaction and the Seller and Buyer are unrelated to each other by family, marriage or commercial enterprise.” “The Buyer agrees not to sell the property within 90 days of closing of this sale.”
      1. 8. The closing must occur within ____ calendar days of the Sales Contract execution date.
    8. Foreclosure Sale Suspension. We may initiate or continue the foreclosure process as permitted by the mortgage documents; however, we will suspend any foreclosure sale date until the expiration date of this Agreement or the date of closing of an approved short sale, whichever is later, provided you continue to abide by the terms and conditions of this Agreement.
    9. Satisfaction and Release of Liability. If all of the terms and conditions of this Agreement are met, upon sale and settlement of the property, servicer will prepare and send for recording a lien release in full satisfaction of the mortgage, foregoing all rights to personal liability or deficiency judgment.
    10. [Insert only if applicable.] Mortgage Insurer or Guarantor Approval. The terms and conditions of the sale are subject to the written approval of the mortgage insurer or guarantor.
    11. Termination of this Agreement. Unless otherwise agreed by the parties, this Agreement will terminate on [insert date]. We may also terminate this Agreement at any time if:
      1. Your financial situation improves significantly, you qualify for loan modification, you bring the account current or you pay off the mortgage in full.
      2. You or your broker fails to act in good faith in marketing and /or closing on the sale of the property, or otherwise fails to abide by the terms of this Agreement.
      3. A significant change occurs to the property condition or value.
      4. There is evidence of fraud or misrepresentation.
      5. You file for bankruptcy and the Bankruptcy Court declines to approve the Agreement.
      6. Litigation is initiated or threatened that could affect title to the property or interfere with a valid conveyance.
      7. [Insert only if applicable:] You do not make the payments required under this Agreement.
    12. Settlement of a Debt. The proposed transaction represents our attempt to reach a settlement of the delinquent mortgage. You are choosing to enter into this Agreement even though there is no guarantee that the transaction will be successful. In the event this transaction is unsuccessful, we may exercise our remedies under the mortgage, including foreclosure.

    Short Sale Program—Additional Information

    · You can’t list the property with or sell it to anyone that you are related to or have a close personal or business relationship with. In legal language, it must be an “arm’s length transaction.” If you have a real estate license you can’t earn a commission by listing your own property. You may not have any agreements to receive a portion of the commission or the sales price after closing. Any buyer of your property must agree to not sell the home within 90 calendar days of the date it is sold by you. You may not have any expectation that you will be able to buy or rent [servicer may delete “or rent” in accordance with investor guidelines] your house back after the closing. Any knowing violation of the arm’s length transaction prohibition may be a violation of federal law.

    · We will need to talk to your broker and others involved in the sale. By signing this Agreement, you are authorizing us to communicate and share personal financial information about your mortgage, credit history, subordinate liens, and plans for relocation with your broker and other third parties that could be involved in the transaction including employees of the United States Treasury and its financial agents, Fannie Mae and Freddie Mac.

    · The difference between the remaining amount of principal you owe and the amount that we receive from the sale must be reported to the Internal Revenue Service (IRS) on Form 1099C, as debt forgiveness. In some cases, debt forgiveness could be taxed as income. The amount we pay you for moving expenses may also be reported as income. We suggest that you contact the IRS or your tax preparer to determine if you may have any tax liability.

    · We will follow standard industry practice and report to the major credit reporting agencies that your mortgage was settled for less than the full payment. We have no control over, or responsibility for the impact of this report on your credit score. To learn more about the potential impact of a short sale on your credit you may want to go to http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm.

    Real Estate Agent Obligations

    • Cancellation clause—seller may cancel without notice and without paying commission if property is conveyed to mortgage insurer or mortgage holder.
    • Contingency clause—sale is subject to written agreement of all sales terms by the mortgage holder and, if applicable, mortgage insurer.

    What are the HAFA rules regarding real estate commissions?

    The servicer specifies the amount of commission in the Short Sale Agreement (SSA) as a “reasonable and customary” closing cost. The borrower and the prospective real estate broker may negotiate with the servicer on the terms of the SSA. If the borrower and the listing broker decide to participate, both must sign the SSA, agreeing to its terms.

    There is a different rule if the borrower submits an executed sales contract to the servicer for approval before a SSA is executed. In that case, the sales contract is submitted to the servicer along with an Alternative Request for Approval of Short Sale. The amount of the commission in such a case is the amount negotiated in the listing agreement, not to exceed 6 percent.

    Neither buyers not sellers may earn a commission in connection with the short sale, even if they are licensed real estate brokers or agents. They may not have any side deals to receive a commission indirectly.

    Borrower Obligations

    The borrower must sign and return the SSA within 14 calendar days from its Effective Date along with a copy of the real estate broker listing agreement and information regarding any subordinate liens. In returning and signing the SSA the borrower agrees to:

    • Cooperate with the listing broker to actively market the property and respond to servicer inquiries. Maintain the interior and exterior of the property in a manner that facilitates marketability.
      • Keep your house and your property in good condition and repair and cooperate with your broker to show it to potential buyers.
    • Provide all information and sign documents required to verify program eligibility.
      • At several stages of the short sale process, such as after an offer is received, you will need to complete some paperwork. You are responsible for returning all documents within the time allowed in this Agreement.
    • Work to clear any liens or other impediments to title that would prevent conveyance.
      • Be able to provide the buyer of your home with clear title. To start, determine if you have other loans, judgments or liens secured by your home, such as a home-equity line of credit or a second mortgage. If there are such liens, you will need to either pay these loans off in full or negotiate with the lien holders to release them before the closing date. Under this program, you must make sure other lien holders will agree not to pursue other legal action related to the pay off of their lien, such as a deficiency judgment. You can get help from your broker to negotiate with the other lien holders.
      • We may allow up to 6% of the unpaid principal balance of each loan (not to exceed an aggregate of $6,000 for all the loans in total) to be paid from the sale proceeds to help get a lien release. If you have these types of liens or loans on your home, please gather any paperwork you have (such as your last statement) and send it to us when you return this signed Agreement. Remember, clearing these other liens and delivering clear and marketable title is your responsibility.
    • Make the monthly payment stipulated in the SSA, if applicable.
      • Make partial mortgage payments of $_________ by the first day of each month beginning on __________ 1, 20___ until your house is sold and title is transferred. While you are selling your house, you still legally owe the full amount of your current monthly mortgage payment. However, as part of this Agreement, we will accept this reduced payment until the house is sold and closes or this Agreement expires. These payments do not constitute a modification of your mortgage.

    Purchase Offer: Request for Approval of Short Sale & Alternative Request for Approval of Short Sale

    Request for Approval of Short Sale (RASS, click here for sample). Within 3 business days of receiving an executed purchase offer, the borrower (or agent) must submit a completed Request for Approval of Short Sale (RASS) to the servicer, including a copy of the sale contract and all addenda buyer documentation of funds or pre-approval/commitment letter from a lender all information on the status of subordinate liens and/or negotiations with subordinate lien holders.

    Alternative RASS (click here for sample). If the borrower already has an executed sales contract and asks the servicer to approve it before an SSA is executed, the Alternative RASS is used instead. The Servicer must still consider the borrower for a loan modification.

    Approval or Disapproval of Sale

    Within ten business days of receipt of the RASS and all required attachments, the servicer must indicate its approval or disapproval of the proposed sale by signing the appropriate section of the RASS and mailing it to the borrower.

    The servicer must approve a RASS if the net sale proceeds available for payment to the servicer equal or exceed the minimum net determined by the servicer prior to the execution or extension of the SSA and all other sales terms and conditions in the SSA have been met. Additionally, the servicer may not require, as a condition of approving a short sale, a reduction in the real estate commission below the commission stated in the SSA.

    The servicer may require that the sale closing take place within a reasonable period following acceptance of the RASS, but in no event may the servicer require that a transaction close in less than 45 calendar days from the date of the sales contract without the consent of the borrower.

    Closing and Lien Release

    The servicer may require the closing to take place within a reasonable period after it approves the RASS, but not sooner than 45 days from the date of the sales contract unless the borrower agrees.

    The servicer must follow local or state laws to time the release of its first mortgage lien. If local or state law does not require release within a specified time, the servicer must release its first mortgage lien within 30 days. Investors must waive rights to seek deficiency judgments and may not require a promissory note for any deficiency. Rules also apply to participating junior lien holders.

    What else should I know?

    · The deal must be “arms length.” Borrowers can’t list the property or sell it to a relative or anyone else with whom they have a close personal or business relationship.

    · Buyers may not reconvey the property for 90 days.

    Compliance

    Servicers must comply with the HAFA short sale and DIL requirements specified in this

    Supplemental Directive and any subsequent policy guidance. Servicers must have adequate staffing and resources for responding to borrower requests for participation, for receiving and processing HAFA documents in accordance with program guidelines and for ensuring that inquiries and complaints about HAFA receive fair consideration, along with timely and appropriate response and resolution.

    Treasury has selected Freddie Mac to serve as its compliance agent for HAFA. In its role as compliance agent, Freddie Mac will utilize Freddie Mac employees and contractors to conduct independent compliance assessments. The scope of the assessments will include, among other things, an evaluation of documented evidence to confirm adherence (e.g., accuracy and timeliness) to HAFA requirements.

    Release of Subordinate Liens

    It is the responsibility of the borrower to deliver clear marketable title to the purchaser or investor and to work with the listing broker, settlement agent and/or lien holders to clear title impediments. The servicer may, but is not required to, negotiate with subordinate lien holders on behalf of the borrower. The servicer, on behalf of the investor, will authorize the settlement agent to allow a portion of the gross sale proceeds as payment(s) to subordinate mortgage/lien holder(s) in exchange for a lien release and full release of borrower liability. Each lien holder, in order of priority, may be paid no more than six percent (6%) of the unpaid principal balance of their loan, until the $6,000 aggregate cap is reached. Payments will be made at closing from the gross sale proceeds and must be reflected on the HUD-1 Settlement Statement. Investors are eligible for incentive reimbursement for up to one-third of the cost to extinguish subordinate liens as described in the Incentive Compensation section of this Supplemental Directive.

    Prior to releasing any funds to subordinate mortgage/lien holder(s), the servicer through its agent must obtain written commitment from the subordinate lien holder that it will release the borrower from all claims and liability relating to the subordinate lien in exchange for receiving the agreed upon payoff amount. Although servicers have discretion to draft policies and procedures for ensuring that the commitment of subordinate lien holders is documented prior to closing and such documentation is retained in the servicing file, they would be in compliance with HAFA guidelines if they further required the closing attorney or agent to either confirm that they are in receipt of this commitment from subordinate lien holders on the HUD-1 Settlement Statement, or request that a copy of the written commitment provided by the subordinate lien holder be sent to the servicer with the HUD-1 Settlement Statement which is provided in advance of the closing.

    Subordinate mortgage/lien holder(s) may not require contributions from either the real estate agent or borrower as a condition for releasing its lien and releasing the borrower from personal liability. In addition, any payments to subordinate mortgage/lien holder(s) related to the short sale or DIL must be reflected on the HUD-1 Settlement Statement, as applicable.

    Mortgage Insurer Approval For loans that have mortgage insurance coverage, the

    servicer/investor must obtain mortgage insurer approval for HAFA foreclosure alternatives. A mortgage loan does not qualify for HAFA unless the mortgage insurer waives any right to collect additional sums (cash contribution or a promissory note) from the borrower.


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    Mitchell Diamond, Esq.
    mitch@diamondlawgroup.com

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