HAFA helps standardize the short sale and deed-in-lieu process by creating an alternative to foreclosures for homeowners unable to successfully modify their troubled mortgage under HAMP.

Although not perfect, the program reflects C.A.R.’s efforts in the federal arena to standardize the short sale process, protect your business, and safeguard commissions. It also makes clear the timeframes by which servicers must respond to an offer on a short sale.

The HAFA program will permit pre-approved short sale terms before a property is listed; prevent servicers from attempting to reduce real estate commissions established in the listing agreement as a condition for short sale approval; release borrowers from future liability for the debt; and provide financial incentives to borrowers, servicers, and investors.

Under terms of the program, the borrower and/or listing broker have three business days to submit an executed purchase offer and related documents to the servicer on a short sale, and the servicer has 10 business days to respond to an executed purchase offer. The servicer may negotiate the real estate commission prior to the listing of the property, not to exceed 6 percent, but once this has been agreed to the commission may not be reduced at a later date.

The servicer also will determine the minimum net proceeds for a short sale; if an offer presented to the servicer by the borrower or listing broker meets the net proceeds requirement, then the servicer must accept it.

Each participating servicer also must develop a written policy that describes the basis on which the servicer will offer the HAFA program to borrowers. All borrowers must be evaluated for a loan modification prior to going to HAFA. For additional information, please go to car.org at http://www.car.org/governmentalaffairs/federal/ustreasuryfap/.

HAFA is a step in the right direction toward helping distressed homeowners now, and is an effective tool to quickly move distressed properties through the market. Although HAFA goes into effect April 5, 2010, our expectation is that servicers may choose to implement it earlier. The program is available only for non-Fannie Mae- or Freddie Mac-owned loans up to $729,750. C.A.R. will continue to reach out to servicers and lenders to encourage their adoption of HAFA and other programs that will help California’s housing market continue to recover. We anticipate that Fannie and Freddie will release their own guidelines soon, and we will share details with you as soon as they are available.

By James R. Hagerty

As he appeared before the House Financial Services Committee Tuesday to discuss the slow progress of government efforts to force lenders to ease payment terms on home mortgages, Anthony B. Sanders was reminded of the movie “Jurassic Park.”

It might be possible to bring dinosaurs back to life, but does that make it a good idea? Similarly, says Dr. Sanders, a professor of real estate finance at George Mason University, it might be possible to slash interest rates on millions of loans, but that doesn’t mean we should.

What if the government’s Home Affordable Modification Program somehow finally gains traction and manages to reduce interest rates to 2% on millions of loans and extend their terms to 40 years? That would just create fresh problems, Dr. Sanders says.

“Our banking industry, Fannie Mae, Freddie Mac and our Federal Reserve would now be sitting on trillions of dollars of mortgages, many at super-low interest rates and stretched maturities to 40 years,” he writes. Any rise in inflation and interest rates would then slash the value of those mortgages. “When one considers the precarious balance sheets of our lending institutions and our government agencies, we should think very, very carefully about loading up their balance sheets with these mortgages,” he warns, adding:

“Congress and the Administration should bear in mind that it is not just the banks that will suffer, but our pension funds, our own government agencies and the viability of the economy going forward.” Banks would be “stuck with low-interest, long-maturity loans on their books that will prevent them from lending to other borrowers or small businesses for a long, long time.”

The solution, he says, is to encourage financial institutions to sell distressed loans and mortgage securities at big discounts from face value to private investors, who could then restructure the loans on realistic terms related to today’s house prices. Such sales would force banks and other financial institutions to book big losses, but perhaps regulators could allow those losses to be absorbed in stages over five years.

If U.S. financial institutions don’t clean up their balance sheets by shedding dud assets soon, “we will make the Japanese zombie banks look the role model for a healthy financial system,” Dr. Sanders says.

But what about all those borrowers struggling to avoid foreclosure? “The (loan) servicers and financial institutions should be able to modify distressed loans as they see as economically appropriate,” Dr. Sanders says. “After all, these are private market contracts between borrowers and lenders.”