The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed, according to an announcement on the Treasury’s website.

Guidelines address barriers that have often sidelined short sales by setting limits on the time it takes a bank to approve an offer, freeing borrowers from debt and capping claims of subordinate lenders.

The incentives, first announced in May, expand on the government’s Home Affordable Modification Program, known as HAMP, that has seen limited success in lowering payments for distressed homeowners. The Treasury earlier on Monday stepped up pressure on mortgage companies to make permanent the 650,000 trial modifications they have started.

“While HAMP program guidelines are intended to reach a broad range of at-risk borrowers, it is expected that servicers will encounter situations where they are unable to approve” or offer a modification, the Treasury said in its announcement.

Financial incentives for completing short sales or similar deed-in-lieu transactions — in which the deed is simply transferred to the lender — include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said. Borrowers would receive $1,500 in relocation expenses.

Short sales are favored by real estate agents and community groups over foreclosure because they can preserve the borrower’s credit rating and leave the property in better condition than when a homeowner is evicted. While primary lenders typically realize steep losses, their recovery is typically far better than under foreclosure.

But short sales have been frustrating for borrowers and real estate agents, often hung up by negotiations with multiple lien holders and mortgage insurance companies. Real estate agents have complained that sales fall through as lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.

Among requirements, mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt.

It also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.

In one of the most contentious issues gumming up negotiations between lenders, the guidance caps the aggregate proceeds to subordinate lien holders at $3,000.

Second lien holders in recent months have begun demanding more money from the first lender, seller, buyer or agent in exchange for releasing their claim, agents have said. Because primary lenders would face larger losses in a foreclosure, some subordinate lenders have felt empowered, the agents said.

The largest second-lien holders are Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co and Citigroup Inc.

Second lien holders may proceed with a short sale outside of the Treasury program, if they felt the cap was too low, a Treasury official said in October.

“If there was a short sale program that didn’t recognize the second lien holder position, it could have pretty damaging consequences for the industry,” Sanjiv Das, chief executive officer of CitiMortgage, said in an interview last week.

“Please Note: The borrower must have a current or eminent financial hardship and the loan must be delinquent.”

For more information on their requirements or to view the entire message in its entirety, visit their site at https://homeloanbusiness.bankofamerica.com/ShortSaleInformation.aspx.

For more information and additional guidelines and qualifications, follow the link to the IRS website:

http://www.irs.gov/newsroom/article/0,,id=206291,00.html

A major concern homeowners facing foreclosure or short sale are troubled over is the impact it has on their credit and their ability to buy a home in the future.  The following information, released by Fannie Mae, is a summary of general credit information along with their updated credit guidelines and requirements affecting troubled homeowners.

What are “extenuating circumstances”?

Fannie Mae describes “extenuating circumstances” as follows:

Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim.  Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax returns (e.g., covering the periods prior to, during, and after a loss of employment).

The lender must obtain a letter from the borrower explaining the relevance of the documentation.  The letter must support the claims of extenuating circumstances; confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on his or her financial obligations.

(Source:  FNMA Selling Guide, 4-1-09 at 391.)

After a FORECLOSURE, how long is the time period required prior to obtaining a new home loan?

Typically 5 years from the completed foreclosures sale date.  However, a shorter time period of 3 years may be allowed in situations where foreclosure was due to extenuating circumstances; in these cases, all requirements still apply with the exception of the 680 minimum FICO.

Because Fannie Mae requires review of the 7 year credit and public record history, the following additional requirements apply up to 7 years following the completion date:

• Principal residence purchase permitted with MINIMUM 10% down payment and minimum credit score of 680.
• Second home or investment property purchases are not allowed.
• Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.
• Cash-out refinances are not permitted for any occupancy type.

(Source:  FNMA Announcement 08-16, 6-25-08)

After a Deed-In-Lieu (DIL) of Foreclosure, what time frame is required before obtaining a new mortgage loan?

Typically a four year time period from the date the deed-in-lieu was executed is required.  However, in the cases that involved “extenuating circumstances” a minimum 2 year time period may be accepted.

Additional requirements that apply up to 7 years following the DIL date are as follows:

^.  Property secured purchases require the greater of 10 percent minimum down payment or the minimum down payment required for the transaction.

^.  Limited-cash-out and cash-out refinance transactions secured by a property are permitted and subject to eligibility requirements in effect at that time. 

(Source:  FNMA Announcement 08-16, 6-25-08) 

After a Short Sale or “pre-foreclosure” sale, how long is the time period before a new property can be purchased?

A two year period following sale completion date is required with no exceptions permitted.(Source:  FNMA Announcement 08-16, 6-25-08) 

Will Fannie Mae purchase the new primary residence loan of a borrower who sold their previous property as a short sale but was never delinquent on that mortgage?

To qualify to be deliverable to Fannie Mae, they require that the borrower is free of any contract or agreement with the previous lender to repay any debt related to the short sale and the mortgage history clear of any 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date.

(Source: FNMA Announcement 08-16 Q&A, 8-13-08; FNMA Selling Guide, Part X, Chapter 3, Section 302.09)

How are short sales or “pre-foreclosures” and deed in lieu of foreclosures reported on a credit statement?

Short sales or Pre-foreclosure sales are typically reported as “paid in full” with a “settled for less than owed” remarks code with the mortgage trade line noting any recent delinquencies.  A deed-in-lieu typically appears on a credit report with remarks code indicating a deed-in-lieu. 

(Source: FNMA Announcement 08-16 Q&A, 8-13-08.)

After a BANKRUPTCY, how long of a time period is required prior to obtaining credit to purchase a property?

With the exception of Chapter 13 bankruptcy, typically a four year time period from the discharge or dismissal date of the bankruptcy is required prior to obtaining a new mortgage loan.  In the case of a Chapter 13 bankruptcy, a two year timeframe from the discharge date or 4 years from the dismissal date is required.  However, where extenuating circumstances are involved, a two year from discharge or dismissal may be accepted.

(Source:  FNMA Announcement 08-16, 6-25-08)

After multiple bankruptcy filings, what is the time period required prior to purchasing a property?  

For borrowers with multiple bankruptcy filings in the past 7 years, typically a five years time period from the most recent dismissal or discharge date is required.  A 3 year time period may be accepted in cases where the most recent bankruptcy filing involved extenuating circumstances.

(Source:  FNMA Announcement 08-16, 6-25-08)

What is the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?

Chapter 13 permits a borrower with a regular income to propose a plan to repay some or all of their obligations over a period of up to five years.  A borrower who files a Chapter 7 is permitted to retain exempt assets and receive a discharge of the borrower’s debts. 

(Source: FNMA Announcement 08-16 Q&A, 8-13-08)

In a Chapter 13 bankruptcy, what is the difference between a dismissal and a discharge?

A Chapter 13 bankruptcy may be dismissed at anytime; by the borrower, as a voluntary dismissal, or by the court if borrower fails to comply with the required payment schedule.  Upon completion of the payment plan, the borrower will receive a Chapter 13 discharge.  The court may also discharge a Chapter 13 case prior to receiving all scheduled payments if they find that the borrower made a sufficient amount of payments and is unable to continue the plan due to extenuating circumstances.

(Source: FNMA Announcement 08-16 Q&A, 8-13-08)

What is “re-established” credit?

In order for credit to be deemed re-established for a new loan application, the following criteria must be met:

• The minimum time period requirement (case-specific) must have been met.
• All accounts must be current as of the loan application date.
• A minimum of four credit references are required; at least one traditional and one housing-related.  The housing-related reference can be in the form of mortgage or rental payments and must be from the period following the foreclosure, deed-in-lieu or bankruptcy discharge/dismissal.  If rent payments were not reported on the credit report, borrower must provide rent verification for the most recent 12-month period (bank statements, money orders, cancelled checks).
• No more than two 30-day past due installment/revolving debt payments in the last 24 months.
• No 60-day past due installment/revolving debt payments since the completion of the foreclosure-related action or bankruptcy discharge/dismissal.
• No past due housing debt payments since the completion of the foreclosure-related action or bankruptcy discharge/dismissal.
• No new public records, including bankruptcy, foreclosure, deed-in-lieu, pre-foreclosure sale, judgment or collection, etc. since the completion of the foreclosure-related action or bankruptcy discharge/dismissal. 

(Source:  FNMA Selling Guide, 4-1-09 at 392)

What is a FICO® Score?

Founded by the Fair Isaac Corporation (known as FICO®), the FICO® score is one of the most widely used credit scoring systems designed to represent an individual’s creditworthiness.  The three credit reporting agencies, Equifax, Experian, and TransUnion, collect data to compile credit reports for consumers which are then used to generate an individual’s FICO® score.  Each consumer has three separate credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.  A FICO® score is between 300 and 850.  The higher your score, the better your credit.

What factors go into determining a FICO® score?

Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are closely-guarded secrets, FICO® has disclosed the following components and the approximate weighted contribution of each:

35% — Payment History – Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a consumer’s FICO® score to drop. Paying bills as agreed over time will improve a consumer’s FICO® score.

30% — Credit Utilization - The ratio of current revolving debt (such as credit card balances) to the total available revolving credit (credit limits). Consumers can improve their FICO® scores by paying off debt and lowering their utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on the FICO® score.

15% — Length of Credit History – As a consumer’s credit history ages, assuming the consumer pays his or her bills, it can have a positive impact on the FICO® score.

10% — Types of Credit Used (installment, revolving, consumer finance) – Consumers can benefit by having a history of managing different types of credit.

10% — Recent search for credit and/or amount of credit obtained recently - Multiple credit inquiries for a consumer seeking to open new credit, such as credit cards, retail store accounts, and personal loans, can hurt an individual’s score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score. However, individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in their scores as a result of these types of inquiries.

(Source: http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx) 
 

How does a mortgage modification affect my FICO® score?

Dependent on whether and how the lender chooses to report the modification to the credit bureaus, will determine the affect it will have on an individual’s FICO® score and overall credit profile.  If a lender indicates to a credit bureau that the consumer has not made payments on a mortgage as originally agreed, that information on the consumer’s credit report could cause the consumer’s FICO® score to decrease or it could have little to no impact on the score.

(Source: http://www.myfico.com/crediteducation/questions/Mortgage_Modification.aspx)  

How does a bankruptcy affect my FICO® score?

Regardless of the type, bankruptcy has a very negative affect on your credit report.  As long as the bankruptcy is listed on your credit report, it will be factored into your score.

Typically, you can expect bankruptcies to remain on your credit report, from the date filed, as follows:

• Chapter 11 and Chapter 7 bankruptcies up to 10 years.
• Completed Chapter 13 bankruptcies up to 7 years.

These time periods refer to the public record item associated with filing for bankruptcy however; all individual accounts included in the bankruptcy should be removed from your credit report after 7 years. 

(Source: http://www.myfico.com/crediteducation/Questions/Bankruptcy-Types.aspx)

How does a short sale, deed-in-lieu-of foreclosure or a foreclosure affect my FICO® score?

Although they may be great alternatives to foreclosure, short sales, and deeds-in-lieu of foreclosure are noted on a credit report as “not paid as agreed” accounts, and unfortunately will all negatively affect your FICO® score. This is not to say that these may not be better options for you from a financial or tax perspective, just that they will be considered no better or worse for your FICO® score.

If you are considering bankruptcy as an alternative to foreclosure, please keep in mind that while a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO® score.

(Source: http://www.myfico.com/CreditEducation/Questions/foreclosure-alternatives-fico-score.aspx)

For more information and for a FREE No Obligation assessment of your unique situation, please contact our office for immediate assistance.

http://nphsrealestate.org/contact-us/

Servicers will follow the standard procedures for the DIL process and determine whether borrowers are eligible for Deed for Lease program.  Information on qualified borrowers is then sent to a contracted property management company who will then continue to verify property and prospective tenant information and complete the lease process.  The following is important information and instruction for borrowers interested in the program:

• It is MANDATORY that the property manager receives a response from you WITHIN 5 BUSINESS DAYS of receiving your referral.  If no action is made within that time, they will assume you are no longer interested and you will no longer be considered for a lease.  If you have not been contacted within three business days, please call 1.800.732.6643.
• A $75 NON-REFUNDABLE lease application fee per occupied unit is required by the property manager to process file.
• If a tenant is interested in the program, the borrower is required to provide a copy of their current lease and contact information on their tenant.
• Lease only becomes effective upon acceptace of the Deed-in-Lieu by the lender and upon acceptance, occupant will then need to provide the prorated rent for the time the DIL was accepted through the end of the month PLUS the following full month’s rent.
• If the Deed-for-Lease application is denied, borrowers are still able to proceed with the DIL however must vacate the property following normal procedure.

The program will be available immediately to all Fannie Mae approved lenders however has not been approved for properties with HECM (reverse), USDA (rural), FHA, VA and second lien loans.  To qualify, the property and occupants must follow these guidelines:

• Property must be free of any zoning or HOA limitations prohibiting a lease.
• Property is in compliance with local laws or can be brought into compliance within 30 days and any required repairs are all within reasonable range based on property value.
• Current market rental income is sufficient to cover ongoing maintenance and management costs.
• Property is not within a target area for any government, corporate, or community neighborhood stabilization plan which may need the property as part of the plan.
• Property is to be used as primary residence and the number of prospective occupants is in compliance with local laws and HOA regulations.  Renter’s insurance my also be required if pets are to be considered in the lease.
• Inspection proves the occupants have been keeping it in good condition and no sign of illegal activities have been taking place at the property.
• All occupants signing the lease will have credit reviewed and market rental rate determined may not be more than 31 percent of total gross income.
• Any prospective occupant over 18 must have cleared background check, including clearance from the Office of Foreign Assets Control (OFAC).

For more information and to view the full announcement, visit the Fannie Mae website at www.fanniemae.com.

To view the full announcement from the Department of Real Estate visit their site at:

http://www.dre.ca.gov/pdf_docs/SB94WebAnnouncement(brokers).pdf

This is the wording  of a typical document:

AFFIDAVIT OF “ARMS LENGTH TRANSACTION”

All parties to the contract on the premises dated ____________________________

Property Address:

Hereby affirm that this is an “Arms Length Transaction”

No party to this contract is a family member, business associate, or shares a business interest with the mortgagee. Further, there are no hidden terms or special understandings between the seller or buyer or their agents or mortgagee.

The buyers and sellers nor their agents have any agreements written or implied that will allow the seller to remain in the property as renters or regain ownership of said property at anytime after the execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission.

_________________________________                              _____________________________

(Seller)                                     Date                                          (Seller)                                   Date

_________________________________                              ______________________________

Print Name                                                                              Print Name

_________________________________                              ______________________________

(Seller’s Agent)                            Date                                   (Buyer’s Agent)                      Date

_________________________________                              ______________________________

Print Name and Company                                                      Print Name and Company

_________________________________                              ______________________________

(Buyer)                                          Date                                  (Buyer)                                    Date

__________________________________                            ______________________________

Print Name and Title Co. Name                                             Print Name and Title Co. Name

Get advice from a HUD certified counseling agency.  call us today!

 The new law also contains regulations on short sale approvals subject to lender’s review of the property’s closing statement.  What once was a typically lengthy process has now been limited to review time of four days.  If no action has been taken by the lender within the four day window, the closing statement shall be deemed approved, as long as it is “not clearly contrary to the terms of the short-pay agreement or the short-pay demand statement provided to the escrow holder.”

Effective January 1, 2010, all regulations mentioned, along with the remaining legislations encompassed within Senate Bill 306, come into effect. 

Follow the link for more information on Senate Bill 306.

http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0301-0350/sb_306_bill_20090806_chaptered.pdf

To bring public awareness and prevent any further damage, the California State Bar has released the names of 16 attorneys under investigation and urges all homeowners seeking assistance to be aware of scams by researching the organization before participating in any programs.

The list of attorneys currently under investigation is available at http://calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395