Posted on Monday, March 8, 2010
This is the Home Affordable Foreclosure Alternative program (HAFA) Actually part of the original Making Home Affordable program Obama announced last February (3 parts to that program – HAMP modifications, HARP refinances, HAFA short sales and deeds in lieu). 2010 will be the year of the short sale
Amongst refi, mod and short sale/DIL, short sale DIL (i.e. HAFA) is the best fit for the problem the way it has evolved not by choice but by default. The HAMP mod program was crafted when this was a subprime mortgage problem – interest rates on subprime adjustable loans were moving up abruptly, causing borrowers who could otherwise afford their home to no longer be able to afford a suddenly much higher mortgage payment. Modifying the mortgage using the HAMP formula by decreasing the rate, increasing the amortization, etc, was a great solution for that problem. But this is no longer a subprime mortgage crisis – its affecting prime loans, jumbo loans, higher end borrowers, and the big drivers now are not subprime rate resets but rather unemployment and negative equity – HAPM mods don’t work in those situations. That solution no longer suits the problem because the problem has evolved into another animal. So the 3 to 4 million HAMP was supposed to help – fageddabout it. Ditto HARP – refinances would have helped the 4 to 5 million originally predicted if so many had not lost their jobs making them ineligible for a refinance and experienced so much more property value drops, making their homes ineligible for the HARP refinance which only allows up to 125% negative LTV. Government has been blaming the banks for these programs not working. In truth it’s the programs themselves and no one is to blame…the problem simply evolved.
Sooooo, a short sale or DIL is most suitable because its the only option left.
The number of folks with problems will grow from natural causes but it will also swell further when folks realize they can walk away from the deficiency under this program…who wouldn’t take advantage of avoiding a huge financial obligation when the government is telling you its alright to do and all your friends and neighbors are doing it? For this reason I do not agree that the banks should simply eat the deficiency themselves. I believe this should be a shared burden with the borrower. Not doing so (1) sends the wrong message to borrowers / moral hazard and (2) puts banks already having trouble with buy backs and other general conditions in an even worse place. Besides, both the borrower and the bank "bet" on the home. No question the deficiency is the big problem across the board. How to deal with that “missing money” that we all know in truth ended up in someone’s pocket during the bubble. Carrying and disposing of REOs will also created significant further burden on the banks and shadow inventory making it harder for everyone else to sell.
Also once these sales (either short sale or REO if the banks take a deed in lieu) hit the books its going to drive property values down even further. One idea I've suggested may work (depending on investor PSA etc) is to arrange for some of these mortgages to be assumable – this will enable more to sell as short sales and generate a better price/keep comps higher.
So far one area that banks have been doing a pretty good job is in valuing the real estate they have as REOs to sell and evaluating sort sale offers. Granted they are not set up to process and accept offers and sometimes no one wants the responsibility for having made those decisions so responses to short sale offers are hard to come by, but many times when Realtors and bargain hunters complain to me about a bank not responding to short sale offers, I eventually discover that its because the offers are ridiculously low. Thats not to say there are many other times the banks just drop the ball.
The fact that doing an short sale or DIL looks better on your credit report and will enable you to buy a home sooner than simply allowing a foreclosure should be getting more press. This is a FREE benefit (ie it doesn’t cost the government any bailout money) and many folks are not aware of this incentive. I would even go so far as suggesting a special credit marking just for this situation to add more FREE incentive for homeowners to deal with the issue proactively rather than force the bank to foreclose. It might be argued that the cost savings on future credit cards and all other things tied to your credit report rating is almost as good as an actual financial incentive since the more you can save your credit rating, the more you can save in interest on future borrowing snd related "purchases."
It remains to be seen whether lenders will participate in HAFA since they will lose money by forgoing the deficiency (mind you in non-recourse states this is moot and in the past many lenders did not aggressively pursue deficiencies anyway but my suspicion is they would at least be selling the judgments to collections firms for some benefit this time around) AND will essentially be required to forego second mortgages. Much will depend on the success of the valuation method for determining whether a short sale offer is acceptable or not. Another important HAFA program detail is that after 90 days on the market trying to do a short sale, borrowers can elect to do a deed in lieu, meaning even more probably loss for lenders. I think it an incentive for borrower to do everything in their power to make a short sale successful rather than just go through the motions so they can do a DIL would be important. Since short sales theoretically generate a higher price more quickly than REOs, this will keep compass and everyone else’s home value higher and bank costs and losses lower. Normally the threat of a deficiency provides this incentive, but with that removed I do not see any incentive any longer for borrower to help mitigate these losses for their banks and neighbors.
One last thing, its going to take lenders time to ramp up to handle the HAFA dynamics, even with Realtor help. So as was the case with HAMP and HARP, I wouldn’t expect to see HAFA hit the ground running in April even if it will probably run a bit smoother given the practice the banks have already had ramping up for these programs.