These are hard times. Ever-larger numbers of people have lost their jobs or had their hours cut. People are using their credit cards to pay for basic necessities. The nightly news is full of stories of despair. Foreclosure rates are soaring.

Problems posed by lost income have been compounded by dramatically decreased real estate market values.

Many houses are not worth what their owners paid for them just a few years ago, so even those who are fortunate enough not to be facing foreclosure are dealing with the reality that they may owe more on their mortgages than their real estate is worth.

The federal government has stepped in to provide more help for Americans facing that situation.

The new Home Affordable Foreclosure Alternatives Program, which took effect April 5, follows a number of other programs already in effect, including the Home Affordable Modification Program, which tries to reduce the monthly payments homeowners owe their lenders.

HAFA provides monetary incentives and streamlines logistics in connection with short sales and deeds-in-lieu of foreclosure.

The program’s provisions are particularly important as they relate to short sales: when a lender agrees to accept less than the seller actually owes on the property.

For example, if you borrowed $250,000 and can now sell your home for only $200,000, it’s a short sale when the lender agrees to accept $200,000 as full payment.

You have no legal right to a short sale. The ultimate decision is up to your lender.

You must be in hardship, defined by lenders as circumstances out of one’s control. Examples include job loss, job relocation, family illness, divorce, significant increase in mortgage payment because of an interest adjustment and an unforeseen increase in living expenses.

However, the new requirements under HAFA should provide incentives for using short sales.

Before passage of the Mortgage Debt Forgiveness Act of 2007, short sales had one glaring disadvantage: The forgiven debt or mortgage deficiency was considered income the bank gave to you and was reported to the IRS. You had to pay tax on that amount.

The Mortgage Debt Forgiveness Act of 2007 allowed gains of up to $1 million on a short sale to be forgiven if the sale involved a primary residence and took place from 2007 through 2010.

HAFA extends this benefit, provides some financial incentives and adds refinements related to when a short-sale package can be arranged, real estate commission fees, liability for first mortgage debt and liens. These issues had tended to slow down or even halt the short-sale process.

Previously, a borrower had to have entered into a purchase-and-sale contract with a buyer before the short-sale package was even sent to the lender. Under the new HAFA requirements, the borrower may receive a pre-approved list of short-sale terms before listing their property.

HAFA bars lenders from requiring a reduction in the real estate commission agreed to under the listing agreement, up to 6 percent. As well, buyers must be fully released from future liability for the first-mortgage debt and provide incentives to subordinate lien holders.

HAFA will also try to use uniform documents and time frames to streamline the short-sale process. It offers financial incentives, including $1,500 for borrower relocation assistance; $1,000 for lenders to cover administrative costs; and a match of up to $1,000 to investors for allowing a total of up to $3,000 in short-sale proceeds to be distributed to subordinate lien holders.

The HAFA program concludes Dec. 31, 2012.

If a short sale is something that can provide relief to your current financial situation, please remember to use competent and professional individuals in the loss mitigation process.

Unfortunately, there are people who are specifically looking to prey on distressed homeowners. Since the buyer will pay the loss mitigation fee at the closing table on behalf of the borrower, there should never be any up-front fees.

As an attorney who represents borrowers in the loss mitigation process, I am very pleased to see some governmental relief in the current short-sale market. In these circumstances, it is important that people educate themselves on their legal options. Remember, you do have options.


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