The high level details from the press release (My comments added in red):
One may ask what is in it for the investor since several of these deal points take money from them. The loss will most likely be less in the above scenario over a foreclosure. Since it takes so long to foreclose that is many months the investors money is tied up with no return. Also the house will most likely not be maintained once it is clear foreclosure is inevitable. Then there is the turn around time for getting the house onto market once it is foreclosed. All add up to increasing the investors loss.
The HAFA program simplifies and streamlines the use of short sale and DIL options by incorporating the following unique features:
Complements HAMP by providing viable alternatives for borrowers who
are HAMP eligible. In other words, borrowers who are eligible for HAMP but smart enough to realize it isn't in their best interest.
Utilizes borrower financial and hardship information collected in conjunction with HAMP, eliminating the need for additional eligibility analysis.
Allows the borrower to receive pre-approved short sale terms prior to the property listing. Extremely important point, this turns short sales from the nightmare they are now into a smooth transaction. Short sale prices will improve as a result and transaction volume should go up.
Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement. Clearly a win by the NAR, the max commission is set at 6%. In many places in California 5% is pretty much max. Investors will be getting 1% less in California as agents will be sure to be smart enough to be asking for 6%. The listing agent will probably get that particular bonus right now with inventory so low there is no reason to up the selling office commission.
Requires that borrowers be fully released from future liability for the debt. A clear win for borrowers, especially in many of the recourse states or who refinanced in places like California which allows recourse on refinances. Borrowers will be much more likely to participate if they realize after the sale is done they are out from under their massive debt. Like the commission deal point this one comes at a cost to investors.
Provides financial incentives to borrowers, servicers, and investors. Borrowers get $1,500 for completing a short sale, Servicers get $1,000, investors only get money for settling junior liens, up to $1,000.
This is the best program I've seen yet from the Administration because it deals with the reality of the market. It has tremendous potential of reducing the overhang of "shadow inventory" on the market. The only downside I have seen so far in a quick skim of all the documentation is that the program doesn't officially start until next April though services may opt to start sooner. I think with the political pressure being brought on servicers to reduce foreclosures and the desire for servicers to please both their investors and regulators this program could become a home run and could be a real beginning of the end of the housing crisis.