A short sale occurs when a home owner who is having trouble making their mortgage payments will ask their lender for special consideration to accept less than is owed in order to sell the home quickly and to avoid foreclosure. This keeps a foreclosure from tarnishing the homeowner’s credit record while also keeping the property off the bank’s inventory. If a bank denies a short sale, the homeowner often ends up losing the home to foreclosure and, after an unsuccessful foreclosure auction, the property becomes a REO or real estate owned property where ownership defaults to the lender.
 
Regardless of whether a short sale or a REO sale occurs, statistics show that values naturally decline on properties where the mortgage has gone into default. To this point, most borrowers in financial troubles are unlikely able to keep up with necessary maintenance on the property. Since short sale properties are sold much faster and often without hitting the MLS or costly foreclosure auction block, banks are more apt to accept a reasonable short sale offer than to refuse.  Generally lenders see less loss financially when dealing in short sales, but also get more marketable and often profitable properties out of REOs. 

To help the economy get jump started again the first time buyer tax credit was established. It has in fact caused a frenzy of activity, which brought on the Home Affordable Foreclosure Alternative program, otherwise known as HAFA.  The purpose of this program is to streamline the short sale process although some questions if HAFA is going to cause more headache and trouble for an already troubled industry.

HAFA has created standardization of short sales and deed in lieu of foreclosures. This is one definite benefit to having HAFA in place as it eliminates the wide range of agreements that vary from situation to situation.  A benefit for borrowers is that lenders are now required to standardize their approval criteria for short sales and deed in lieu sales. With this practice in place, borrowers can now have a better idea if an offer will be accepted and exactly what the offer being accepted means.

The HAFA program is part of the federal Home Affordable Modification Program (HAMP). The small print that many aren’t aware of is that borrowers must have applied for a HAMP loan modification before they are able to be accepted for a HAFA streamlined short sale approval. This alone will lower the number of HAFA required short sales.

Lenders that participate in HAFA are required to forgive the loan deficiency if the borrower is approved for the short sale. This goes against most lenders’ standard process offering debate about which lenders will fall within the HAFA mandate.  With the debates and questions regarding HAFA, many do not see HAFA shortening the short sale process any time soon.

Short sales seem to be picking up right now. But, in the end, will the current REO system be a better way to alleviate these troubled loans? Not every parcel and bid will qualify for the terms of the lender’s or HAFA’s new shorter short sale process.  In cases where a short sale is not the best option, lenders will be forced to institute a foreclosure. Accordingly, an effective REO disposition process must be maintained by mortgage lenders.   In any event, everyone benefits from a timely process which retains as much value as possible in our homes.