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Short Sale Program To Help Borrowers With Second Liens

Short sales have helped a good number of troubled homeowners, but have so far missed a growing portion of the market: those who have underwater mortgages and second liens at the same time. These borrowers are the target of new changes in the government's Home Affordable Foreclosure Alternative (HAFA) program, which aims to make short sales more accessible to those who need them.

Under the guidelines, lenders will be offered incentives for allowing short sales on homes with second liens. The transaction is normally complicated by the additional layer of approval imposed on the sale, but the incentive is expected to loosen lenders' standards and encourage them to work together to help struggling borrowers.

Prior to the change, homeowners with second liens had trouble getting their second mortgage holders to approve the short sale because the primary lender often keeps the majority share of payments. In most cases, foreclosures and short sales presented the same loss, so the home would just go into foreclosure.

The HAFA program is designed primarily for homeowners who do not qualify for other forms of loss mitigation. To qualify, one must have previously applied and been refused for a loan modification under HAFA’s sister program, the Home Affordable Modification Plan (HAMP).

Homeowners are advised, however, to negotiate the short sale with their lenders so that they do not have to continue paying afterwards. There have been cases where lenders, either for the first or second mortgage, have come calling after the short sale asking for costs to be settled.