Problem Seven

Improper Qualifying of Short Sale Applicants

Problem

Realtors and title companies are not qualifying homeowners for a short sale, specifically when the homeowner wants to stay current on their mortgage.
 
When a homeowner is applying for a short sale, initial paperwork is often submitted to the Making Home Affordable (MHA) program through the Home Affordable Foreclosure Alternatives (HAFA), bypassing Home Affordable Modification Program (HAMP).

It has become a common practice to encourage underwater homeowners to be delinquent because the delinquency provokes action from loss mitigation departments. And, it is common to hear major lenders promote a “faster track” of service for “already 90 days delinquent” homeowners at homeowner seminars. However, more and more homeowners are insisting on staying current throughout the short sale process, even with an acceptable hardship. And homeowners want to stay current on their mortgage for a variety of reasons: 1) fear of what negative credit will do to the growth of small businesses, 2) inability to be delinquent due to jeopardy to security clearance for government employees, 3) resistance to lifelong habit of building and keeping good credit, and a host of other reasons.

If a homeowner enters through HAFA and then insists on being current on their mortgage, the short sale request is typically escalated to the investor level. Most investors require a delinquency in order to approve the short sale, even though HAFA allows current mortgage payments through “imminent default” (which means current, but will be delinquent in the foreseeable future). The reason for the denial of a short sale when a homeowner is trying to stay current through the process is hard to receive. In most cases, the denial comes back with the Reason for Denial left blank. Upon finding that the investor is requiring the delinquency, homeowners or agents need to question and press why the homeowner was not able to proceed with the short sale while staying current. Press this and the answer is commonly that the homeowner did not enter MHA through HAMP 1st.  Hamp “waterfalls” to HAFA, and if the entry is not through HAMP 1st, the waterfall is from HAFA to the investor guidelines.

Lender HAFA Matrixes

59 participating lenders were asked by the U.S. Treasury to provide a Home Affordable Foreclosure alternatives (HAFA) Matrix that outlines short sale detail.

In researching all HAFA Matrices content:

  • 59: total Participating Lenders
  • 13: no HAFA Matrix or criteria available
  • 46: lender data being used
  • 41, or 89% of lenders allow Imminent Default
  • 15, or 32.6% of lenders state borrower can be current
  • 30, or 65.21% of lenders state payments required

Click here to find Home Affordable Foreclosure Alternatives (HAFA) matrix for your lender.

Solution

A new path is currently being made to help underwater homeowners proceed while staying current on their mortgage. Most industry professionals are unaware of “waterfall criteria” specific for underwater homeowners who need to short sell but want to stay current on their mortgage during the process. There are acceptable hardships and commonly required debt to income (DTI) ratios. By understanding DTI’s and acceptable hardships, professionals helping short sellers to proceed will have a far better idea of chances for success of a short sale approval upfront.

1) Start through HAMP with a written request from the homeowner that they wish to escalate directly to a short sale through HAFA.

2) Calculate the front ratio of  < 31%: housing debt (monthly principal/interest/taxes/insurance (PITI) and HOA fees) divided into monthly income should be less than 31% debt to income (DTI).

Monthly housing/monthly income < 31%

3) Calculate the back ratio of > 52%:  monthly credit report debt plus the PITI debt divided into gross monthly income should exceed 52% debt to income (DTI).

Monthly housing + monthly credit report debt / monthly income > 52%

4) An eligible hardship, whether from Form 710 for Fannie Mae and Freddie Mac loans, or from the Making Home Affordable list, needs to be given and supported. Please go to “Problem #3 Eligible Hardships Neglected” for complete list of hardships for GSE’s Fannie Mae and Freddie Mac and for non-GSE’s FHA, VA, USDA and portfolio conventional loans.

5) Those meeting this criteria should be put on same “fast track” as those who are 90+ days delinquent on their mortgage. Current paying mortgage holders are in just as much of a hardship as those who are delinquent, as they are continuing to pay throughout the short sale process!

If lender is reluctant to allow to process, allow relocation incentive to be paid to lender for “fast track”.

  •  This is a win/win for lender who:
    •  receives homeowner payments throughout short sale process towards net price
    • avoids additional cost of loss mitigation
    • can receive relocation incentive to improve net price
    • may benefit from goodwill of providing an exit for underwater homeowner that did not destroy their credit!
  • This is a win/win for the underwater homeowner who:
    • exits a property with credit intact
    • exits their home without feeling totally demoralized by the process

P.S. Underwater homeowners polled agreed that they would give up the relocation incentive in order to keep credit intact! 

 

Continue to Problem 8