New legislation went into effect last week to help homeowners that are "upside down" with their mortgage avoid foreclosure. The Home Affordable Foreclosure Alternatives Program (a.k.a HAFA) gives participating banks specific guidelines, including timelines, for processing "short sale" transactions.

The program is somewhat of an extension of the Home Affordable Modification Program (HAMP) that gave incentives to banks to offer loan modifications to homeowners facing loan default. Upon request and within 14 days, the bank is to use the financial and hardship information previously collected for loan modification purposes, to provide pre-approved short sale terms before the homeowner lists the property, including minimum acceptable net proceeds.

In addition to pre-approving the short sale, the participating bank is required to fully release the borrower from future liability. This is significant because some banks previously would agree to release their lien on the property but NOT release the debt, thus converting the loan to an unsecured loan. Additionally, the bank is not supposed to require a cash contribution from the seller in order to approve the short sale.

The government has stepped in to provide the bank with $1,500 to cover administrative costs and the homeowner with $3,000 for relocation assistance. In order to facilitate transactions with more than one lien (i.e. home equity loan or delinquent real estate taxes), the government is offering to match one for three any proceeds that go to subordinate lien holders, up to $6,000 ($2,000 from the government).

Although the program is voluntary on the bank's part, more than 80 banks and loan servicers have already signed on to participate. The only apparent downside of the legislation is that there are no specific penalties for non-compliance. The program went into affect on April 5, 2010 and is set to expire on December 31, 2012.

If you or anyone you know is in need of foreclosure avoidance services, please contact me at John.Plepel@EscrowRE.com or on my cell at (708) 790-8705. In addition to knowing how to use this new law to your benefit, I have also lined up a group of professionals that are available to address any other specific concerns you may have. These professionals include an attorney for legal advice, an accountant to make sure you avoid any unexpected tax implications, and a lender to help you put together a plan, if desired, to qualify for homeownership again in the future.