New Short Sale Program Can Benefit Investors: Federal Push for Foreclosure Alternative Means Buying Opportunities
Investors in property who have several years of experience and are committed to their real estate investment plans are always alert to opportunities to add to their portfolios. They do not hesitate to pursue alternative ways to acquire properties at good prices because they always remember the real estate adage that profit is made at the time of purchase – in other words, profit is ensured by paying the lowest price possible for a piece of real estate.
In the United States, enterprising investors are about to get a helping hand from the federal government, albeit indirectly. As its name suggests, the Home Affordable Foreclosure Alternatives program (HAFA) which took effect April 5, 2010, seeks to discourage foreclosures. The program provides incentives for lenders to accept deeds in lieu of foreclosure and also encourages more property owners who are in arrears in their mortgage payments and more lenders that hold those mortgages to participate in short sales.
How and Why HAFA Encourages Short Sales
In real estate, a short sale occurs when a mortgage debtor sells his or her property for less than is owed on the mortgage and the lender has consented to accept that amount. In a traditional short sale, the debtor must agree to pay part or all of the balance that remains due on the mortgage after the proceeds of the short sale have been applied to the debt.
As explained on the HAFA Web site, owners who engage in a short sale under HAFA and lenders that consent to it must accept the proceeds of the sale as payment in full of the underlying debt.
The federal government has estimated that the value of about 11.3 million U.S. homes is less than what is owed on their mortgages. The government also believes that more than 5 million households are in arrears on their mortgages and at risk for foreclosure. HAFA offers mortgage debtors who meet certain requirements the short sale as an alternative to walking away from their homes and handing over the keys to their lenders or going through the foreclosure process.
According to David Streitfeld in his New York Times article “Program Will Pay Homeowners to Sell at a Loss,” under HAFA, lenders will use real estate agents to determine how much a home is worth, that is, the minimum that a lender will accept. This figure will not be revealed to the homeowner-debtor, but if an offer is made for the property at or higher than the acceptable minimum, the lender is obligated to consent to the short sale.
Traditionally, lenders were cool to the idea of short sales and preferred to take possession of properties through the foreclosure process rather than accept less than the amount owed on a mortgage. But the burst of the housing bubble resulted in a glut of homes on the market, going unsold for months and even longer. This in turn has meant that lenders have much larger inventories of homes (real estate owned or REOs) on their books and for longer periods of time.
The HAFA guidelines specify that every homeowner-debtor who may qualify for the program must be considered for it before the delinquent loan is referred to foreclosure or the lender allows a pending foreclosure sale to proceed. HAFA also allows $1,000 from the sales proceeds to lenders for administrative and processing costs, and $1,500 to the seller as relocation assistance.