Attempts at Relief and Reform


Posted on Thursday, April 15, 2010

Foreclosures are up 35% from last year and 19% from last month, the biggest increase ever. These latest numbers are said to indicate we're on pace for over 1 million in 2010. But, the really scary news will be about short sales and deeds in lieu of foreclosure under the Administration’s Home Affordable Foreclosure Alternative (HAFA) program and others that model it.

Short sales and deeds in lieu are essentially foreclosures in disguise. Granted they don't clog up court systems the same way. And some will argue they save lenders money in comparison to foreclosure. But the impact of short sales and deeds in lieu on the rest of us is essentially the same as a foreclosure. Resale prices on distressed property are about 30% less than market, whether it’s a foreclosure, a short sale or a deed in lieu. That's a 30% hit on comparable sales when any of the rest of us go to refinance or sell our own homes. Our home value and net worth down another 30% thanks to our neighbors’ financial missteps. Even now, before HAFA has gained any traction, 30% of sales are distressed and home sales and prices seem to be stalling. Inventory rose by almost 10% last month to almost 9 months supply. In a good market 300,000 homes are sold each month, but banks are taking back almost that number of homes, adding in an already swelling inventory.

Think about it. If the 4 to 5 million people the Administration initially told us would benefit from the Home Affordable Modification Program (HAMP) by being able to magically make their home mortgage affordable so that they could stay in their homes, instead now line up for a HAFA short sale or deed in lieu, that’s another 4 to 5 million distressed sales at a 30% discount from market value dragging down everyone else’s home value. With 7 million currently in default and 11 million underwater, the number of folks lining up may be even bigger. If that happens we're bound to see more homes sinking under water and, in turn, more owners thinking about a short sale or deed in lieu. And so the adverse feedback cycles continues. What we need are solutions that contain the problem, not cause it to spread.

Until then, the only hope is that HAFA will not be embraced by lenders. After all, the program requires lenders to write down principal (a solution that should only apply to very few loans on a careful case by case basis), waive deficiencies and (if the first lender also holds the second mortgage) waive the second, all requirements that could have further dire accounting, legal and regulatory consequences for already shaky banks. Not to mention long terms impacts on the ability for all of us to get home mortgage money again.

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