Loan servicers participating in the Obama administration’s short-sale incentive program are being given more freedom to pay off second-lien holders, but will be held to stricter timelines for approving or rejecting short sales and forbidden from deducting vendor expenses from commissions paid to real estate brokers.
A new directive from the Treasury Department, which administers the Home Affordable Foreclosure Alternatives Program (HAFA), lifts a cap that had restricted loan servicers to paying second-lien holders no more than 6 percent of outstanding loan balance in exchange for releasing subordinate liens.
It’s the second significant revision of the HAFA program since it launched at the end of 2009. Initially, the cap on payoffs to second-lien holders was 3 percent, with an aggregate total of no more than $3,000. The cap was increased to 6 percent with an overall limit of $6,000 in March 2010.
The $6,000 overall limit remains in place, but eliminating the 6 percent cap gives loan servicers more freedom in dealing with second-lien holders when borrowers owe less than $100,000. Second-lien holders — typically lenders or investors who funded "piggyback" loans — have been a major obstacle to short sales.
The HAFA program is aimed at distressed borrowers who don’t qualify for a loan modification under the Home Affordable Modification Program (HAMP). Before foreclosing on homeowners, loan servicers are instructed to solicit them to determine if they are interested in pursuing a short sale or, if that fails, a deed-in-lieu of foreclosure.
If borrowers are interested in pursuing that option, the new directive gives loan servicers 30 days to send the borrower a short-sale agreement, which spells out list price or acceptable sale proceeds.
Once a borrower has executed a sales contract, the directive gives loan servicers 30 days to communicate their approval or disapproval.
The directive also stipulates that when loan servicers hire contractors to help the listing broker, any associated vendor fees cannot be charged to the homeowner or deducted from the real estate commission.
The Dec. 28 directive takes effect Feb. 1 but loan servicers are free to implement it sooner. It does not apply to mortgages owned or guaranteed by Fannie Mae or Freddie Mac, or insured or guaranteed by a federal agency such as the Federal Housing Administration (FHA), Veterans Administration (VA) or the Department of Agriculture’s Rural Housing Service (USDA).
Although those mortgage guarantors are now involved in about 90 percent of home loans, during the housing boom, subprime lenders made many loans without their participation.
HAMP and HAFA have both been widely criticized for not helping as many borrowers as envisioned.
Last month, California Association of Realtors President Beth Peerce wrote the Treasury Department and the heads of Fannie Mae and Freddie Mac complaining that lenders were taking too long to review and approve short sales, often leading buyers to walk away from deals.
Many real estate agents refuse to handle short sales because of the difficulties involved, Peerce said.
"Eight months after the implementation of HAFA, our members … are extremely frustrated," Peerce said. "HAFA short-sale approvals are not only few and far between, but also generally unworkable."
Peerce said limits on payments to second-lien holders have led many to seek additional payments outside of the transaction — "secretly, outside of escrow, which may constitute loan fraud against the senior-lien holder."
There are also concerns that short sales are vulnerable to "property flopping" schemes — a potential problem that makes the use of broker price opinions rather than appraisals in HAFA transactions controversial.
The National Association of Realtors has defended the use of BPOs in HAFA transactions, saying there is no evidence that reliance on them heightens the risk of mortgage fraud or abuse.
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