STATE of CALIFORNIA -BUSINESS, TRANSPORTATION, and HOUSING AGENCY PETE WILSON, Governor

STATE OF CALIFORNIA -BUSINESS, TRANSPORTATION, AND HOUSING AGENCY Arnold Schwarzenegger, Governor DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT DIVISION OF FINANCIAL ASSISTANCE FEDERAL PROGRAMS BRANCH HOME INVESTMENT PARTNERSHIPS PROGRAM 1800 Third Street, Suite 390-3 P. O. Box 952054 Sacramento, CA 94252-2054 (916) 322-0356 FAX (916) 322-2904

HOME Management Memo #09-02

Date: September 15, 2009

To: HOME State Recipients

From: Thomas Brandeberry, HOME Section Chief

Re: HOME Short Sale Policy

Introduction

The State HOME Program has received a number of requests from State Recipients asking for a process to approve short sales. The purpose of this Management Memo is to outline the HOME Program policy and procedures on short sales, and to discuss some possible alternatives. The State HOME Program’s first goal will always be keeping households in their home.

When a household was first assisted with HOME funds, the State Recipient should have determined that the home was decent, safe and affordable (sustainable) housing for the household. A short sale should be needed only when there has been a change from the initial household circumstances, or when a specific event has occurred, creating financial hardship. HCD approval will be on a case-by-case basis and only for financial hardship situations.

What is a Short Sale?

A short sale occurs when the sales price of a home is less than the total amount of liens encumbering the property. To close, a short sale must have approval from all lenders, acknowledging that the sales price will not cover a portion (up to the total amount) of their existing loan amount. Usually short sales are instigated when a household contacts a listing agent to sell (maybe due to homeowner’s difficulty in making their mortgage payments) and it is determined that the likely sales price will not satisfy all liens. The listing agent will want to continue the process, assuming they can get one or more of the lien holders to “forgive” a portion or the entire lien amount. This may or may not be the best answer for the household. Short Sale Policy

Any transaction that involves a shortage in the repayment of the HOME Promissory Note amount requires HCD review prior to the State Recipient’s approval of the short sale.

The Short Sale Request form (available online) must be submitted electronically to the jurisdiction’s HOME Program Representative along with a preliminary title report (current ALTA policies may also be used). Additional supporting documentation may be required after the request form and preliminary title report have been received.

HCD will review and approve/disapprove the request, which outlines the circumstances of a household’s short sale, but not the short sale itself. Since the State Recipient is the lien holder, all short sale transaction terms must be negotiated and approved by the State Recipient. The Short Sale Request, HDC approval and all supporting documents must be maintained by the jurisdiction in the project file.

Short Sale Alternatives

When a household requests approval of a short sale, the first question that must be considered is “How can this household remain in their home?”

The following contains some alternatives that exist, which should be reviewed with the household. If jurisdictions know of additional alternatives that have been helpful, please let the HOME Program know and we will revise this list from time to time.

. Direct the homeowner to http://www.makinghomeaffordable.gov/ to explore the two federal Making Home Affordable programs (HAMP: Modification with the current lender vs. HARP: Refinancing up to 125% combined-loan-to-value with the current or another lender). The main goal of these programs is to get the monthly house payments (PITI) at or below 31% of their monthly gross income, which should be affordable to most owners.

. Suggest (or assist) that homeowner attempt direct loan modification with current lender.

. The homeowner may seek advice from a HUD-approved free counselor at: http://www.hud.gov/offices/hsg/sfh/hcc/fc/index.cfm? &webListAction=search&searchstate=CA&filterSvc=dfc

. Use local funds to buy out the existing first mortgage and renegotiate the terms (e.g. lower interest rate, recast term of loan to 30 or 40 years). Monthly payments on the new first would be made to your jurisdiction. Under certain circumstances, HOME funds may be used to preserve affordability, after consultation with your HOME Program Representative.

. Direct the homeowner to Freddie Mac and Fannie Mae’s websites for technical advice and resources: http://www.freddiemac.com/avoidforeclosure/; http://www.fanniemae.com/ . Advise them of upcoming foreclosure avoidance workshops in their area: http://www.freddiemac.com/avoidforeclosure/workshops.html#CA

After all the options have been explored, and it is determined that a short sale is the best option, the State Recipient should follow the policy outlined above.

For additional information or questions, please contact your HOME Program Representative.

NOTE: In some cases, the only option may be foreclosure.