HAFA is Buffer Enough Against Short Sale Fraud: Treasury
The US Treasury Department is taking the necessary steps to prevent short sale fraud under the Home Affordable Foreclosure Alternatives (HAFA) program, officials tell HousingWire today.
The announcement is in response to coverage yesterday that reported lenders are already building buffers to protect themselves from an anticipated rise in borrower fraud when HAFA launches on April 5, 2010. HousingWire broke the story to the industry on HAFA’s development when Laurie Maggiano, director of policy at the Treasury’s Homeownership Preservation Office spoke at the MBA’s convention in October.
Maggiano said that under HAFA, the borrower is required to sign a Short Sale Agreement (SSA) and a sales contract asserting that the seller and buyer are conducting an arm’s length transaction and that they are unrelated by either family, marriage or commercial enterprise.
Mary Alice Short, a real estate agent in Minnesota, described a common type of fraud in the short sale arena where borrowers sometimes have a relative or partner purchase the property in a short sale and rent it back to the defaulted borrower. Other instances of third-party buyers short-changing lenders could haunt the new program as short sales rise in demand.
When the parties of a short sale transaction sign an SSA under HAFA, the buyer also agrees not to sell the property within 90 days of closing. Under HAFA, the Treasury also requires the servicer to obtain an independent property value and set a minimum net return on the sale rather than relying on the borrower to provide a sales price.
The Appraisal Institute recently announced that appraisals are the only acceptable model for short sales, but the Real Estate Valuation Advocacy Association (REVAA) recently made an argument for broker-priced opinions (BPOs) and automated valuation models (AVMs).
In addition to outlining standards for valuation, the Treasury also requires the property to listed with a licensed real estate broker who signs the SSA agreement and can be held accountable if he or she is involved in fraud, Maggiano said.
“The servicer may also terminate the SSA at any time if there is evidence of fraud or misrepresentation,” Maggiano said. “This could also be considered a knowing violation of federal law.”
Under HAFA, the Treasury will provide incentives to servicers that provide short sales and deeds-in-lieu of foreclosures to borrowers who do not qualify for a loan modification through the Home Affordable Modification Program (HAMP). Through January 2010, participating servicers in HAMP provided 116,000 permanent modifications.
“HAFA streamlines and establishes a consistent process for use of short sales and deeds-in-lieu, but it does not change the basics of these long used foreclosure alternative options,” Maggiano said. “In the HAFA guidance, Treasury has tried to anticipate and address weaknesses that always exist in a process whose success depends on accurate property values and involves multiple parties.”
Maggiano and industry leaders will headline a Webinar March 25 detailing the ins and outs of the 43 pages of HAFA guidelines.
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