The Treasury Department yesterday gave guidance to servicers on the Home Affordable Foreclosure Alternatives Program (HAFA).

The new version of HAFA looks very much like the one envisioned in the initial announcement made in May.

Yesterday's Treasury announcement includes the general terms and conditions, evaluation process, documentation, and reporting requirements.

The program will take effect April 2010 and servicers already participating in the Home Affordable Modification Program (HAMP) will be required to follow guidance.

One aspect of the the program is that it standardizes the eligibility for short sales. It is available to borrowers who meet HAMP eligibility requirements although do not qualify for a Trial Period Plan or do not successfully complete a Trial Period Plan.

Upon the successful closure of a short sale or deed-in-lieu through the HAFA, the following incentives of $1,500 in relocation assistance to the borrower; $1,000 in expense reimbursement to the servicer; as well as up to $1,000 in investor reimbursement for subordinate lien releases will be given. 

Aside from these incentives, the program uses borrower financial information collected in conjunction with HAMP, removing the need for added eligibility analysis, sets minimum acceptable net sale proceeds to be determined by a consistent written policy developed by each servicer, and requires borrowers  to be fully released from future liability for the debt.

According to analysts from Bank of America Merrill Lynch, the program is positive on the margin.
Even though the program provides standard rules, documentation, and process flow, the ability for servicers to make their own policy will leave HAFA's success largely up to them. 

The success of this program, analysts said, is also a "double edged sword." They explained that short sales limit loss severity because of lower advancing and better bids on the property as compared with REOs.

But, analysts said that increased short sales will shorten the liquidation timelines and release the supply of distressed properties into the market sooner.

One of the key drivers of the better-than-expected headline numbers in the housing market, analysts said, has been the stalled foreclosure process. These numbers could also be attributed to the supply being artificially held back from hitting the market.

They further added that many of the issues that they have highlighted in the past still remain, such as moral hazard.

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