The Obama Administration rolls out yet another government solution to the failing housing market called HAFA – which stands for: Home Affordable Foreclosure Alternatives. It takes effect today but should have rolled out on April 1st as it could make fools out of all of us.
The intent of this program is to save homeowners from foreclosure by allowing them to cooperatively ‘short sell’ their home. A short sale is a sale of property for less than the full amount that is owed on the mortgage, resulting in a deficiency balance. This deficiency under the HAFA program would be forgiven if your bank chooses to participate. Plus, the government is going to give eligible homeowners $1500 to move out of their home. Sounds good?
Before you get all excited and run to your bank to request a HAFA short sale on your property, let me point out some of the shortfalls to this program:
1. In order to qualify for HAFA you must be in serious default on your current loan. If you are one of the many responsible Americans struggling to keep up with your housing payments, then you must first deplete all of your reserves and go into default before you are eligible. Once you sell your home and are forgiven of the excess mortgage debt, you could end up homeless, because you had to use all of your resources first. Well, there is the $1500!
2. Also, in order to participate, you must submit all of your personal financial documents and go through the arduous process to see if you qualify under HAMP first. We have all heard the horror stories of lost paperwork, incompetent staff, and a lack of decision makers. Plus, if you disclose that you have resources, you don’t qualify anyway. Make sure you read the tidbit in the attached directive about them “sharing” your paperwork with other government agencies, like the treasury department. Big Brother IS watching you.
3. The deficiency balance that is forgiven in the short sale could become taxable income. That’s right – you could be dodging the tax man by getting out from under debt that you can’t afford. The only way around this is to prove that 100% of the mortgage debt was either used to purchase the property or to improve it. If you previously refinanced to pay off a car loan or credit card debt (and let’s not mention the vacation, college payments or anything else) then this deficiency is taxable. So understand this – you are broke, out of reserves, homeless and now have the IRS to deal with – no thanks.
4. Despite what they say – your credit history will be destroyed and hurt your future chance of homeownership or any other kind of credit resources. Credit scoring can affect your insurance rates, renting property and even job applications. No small consequence considering all of the above.
So, if you are one of the many responsible American homeowners that is struggling to maintain your housing payments despite job loss, income depletion or other economic factors then HAFA is probably not for you.
We already know that the HAMP program has been a miserable failure as banks have been unable or unwilling to modify current mortgage loans. The administration had hoped to help 3 to 4 million homeowners and to date only 170,000 have received permanent loan modifications of which many of these lucky ones have gone back into default – hmmm!
This is how I see it – It was the Wall Street bankers who created and exploded the housing bubble that has impacted every homeowner. We, the American people have lost over 3 trillion dollars worth of home equity and the majority of us did not create the problem and yet we are the ones living with the consequences. As if lost wealth were not enough, we also suffer from lost jobs, under-employment and a very questionable economy that could take years to recover. All of this while our government continues to back door our cash to the very creators of the housing crisis. So, I conclude this is another hopeless government solution that does nothing for the responsible American homeowner.
Don’t take my word for it – read it yourself. Help for America’s Homeowners – Making Homes Affordable Supplemental – Directive 09-09
https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf
IRS Rulings.
http://www.irs.gov/newsroom/article/0,,id=205004,00.html
Thank you to Sally Herigstad, CPA for furnishing this link. She also warns you to check out your state tax rules as they may differ from the federal ones. http://www.sallyherigstad.com
Mary Tootikian, author of Stunned In America, Sub-Crime Mortgage Crisis, is a 30 year veteran of the mortgage industry and owner of an independent mortgage loan processing company. She is a respected authority on mortgage lending and serves as the voice of reason to restore credible underwriting standards to a very broken industry. Visit her website at: www.stunnedinamerica.com
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