Anyone who’s followed the Art of Short Sales for any period of time knows that we have not been a huge fan of the HAFA, HAMP, and other government programs designed to ease the short sale process.

This week’s CNN article by Diana Olick continues to prove that over a year after its inception, the program continues to draw poor numbers.

HAFA provides financial incentives for servicers and borrowers to do short sales (selling the property for less than the value of the mortgage) and deeds in lieu of foreclosure (basically just giving the property back to the bank). The program launched in April of 2010 and was later streamlined in December, 2010, based on feedback from mortgage servicers, real estate agents and homeowners.

So far, HAFA has completed 7,113 short sales or DIL’s. In April, however, HAFA saw 1,666 completed, up 74 percent from the 959 done in March.

The government is touting this is a huge success – “a 74% growth!” – but as Diana points out, a 74% growth of nothing is still pretty close to nothing.

According to the article, JP Morgan Chase alone does close to 5,000 short sales a month -and that’s just one bank. The expectation is that the top few banks are likely doing in excess of over 20,000 short sales a month – in that light, HAFA is still producing inconsequential results.

Similarily to what we’ve said here, HAFA’s targeted audience limits the exposure it could potentially have.

“HAFA is a taxpayer funded program, so it has eligibility requirements targeted at a certain segment of the population,” says Risotto, noting that the program is for owner occupants who can demonstrate financial hardship and whose first mortgage is less than $729,750. “HAFA is not meant to be for every person looking to do a short sale,” she adds.

That knocks out investors, jumbo loans and borrowers who don’t meet the “hardship” requirements of the Treasury. The big banks are likely more lenient on that last one, again knowing that a short sales will be cheaper in the end than a foreclosure.

What are your thoughts? Had any success with HAFA? Post in the comments and let us know about it!

Came across these very interesting graphs from the excellent Calculated Risk Blog today:

This first graph shows Existing Home Sales from 1994 and forecasted out to Jan 2011. It’s interesting how this corresponds with our other blog post from this morning discussing the woes of the housing market. The artificial boost the homeowner tax credit gave first time homebuyers was quite significant, judging by that great drop in prices.

This graph above makes it look like inventory sure is going nowhere quickly. Despite historically low interest rates and many deals around on houses, people just simply are not buying properties. This means that we can expect some significant foreclosure activity and short sale activity for the next period of time (in our opinion: several more years). This underscores the importance to everyone involved in real estate the emergence of the short sale transaction from a niche category to a truly mainstream way of clearing out bad inventory on the bank’s books. It’s a tough nut to chew, but one banks are really going to have little other options.

Another interesting trend here is that year-over-year inventory, despite being negative for over a year, is now back in neutral territory. For a  true housing recovery, that inventory change needs to be dropping, not increasing, as it is doing here.

The last chart we have here is months of supply. This is a pretty astonishing graph, in that we are now at over a full year of supply! Even in the best of economic circumstances, clearing that kind of inventory takes a significant amount of time.

What does all this mean? It means buckle your seat belts, folks, because it’s gonna be a while before the housing market really sees a turnaround.

More housing news about Freddie and Fannie this time. The interesting thing about this is that they obviously are not pushing short sales as hard as they should be, maybe some of those short sale initiatives aren’t working as planned?

The article comes courtesy of Michael Kraus, who makes a few interesting observations: (a more detailed breakdown of the numbers can be found at REO Insider Magazine)

The losses taken by Fannie Mae and Freddie Mac are becoming an old hat at this point.  Every quarter, we expect to see a loss and an accompanying request for more money from the treasury (thus far we are up to about $150 billion).  A slightly more novel phenomenon is the rapidly mounting number of REO properties owned by Fannie and Freddie.

Fannie and Freddie broke an ignominious record in the second quarter, they now have a record amount of REO inventory on their books.  I imagine this is a record that will be broken several times in the future.

We agree, but what does this mean? Does it mean that the efforts of Fannie and Freddie to process more short sales is falling flat? We all know that short sales typically minimize losses for the lender.

Some quick facts about Fannie and Freddie’s REO portfolio from the article:

• Loan modifications are up 123 percent from last year, but REO inventory is rapidly mounting.
• Freddie’s single-family portfolio is up almost 85 percent, the multi-family holdings are nearly doubled.
• Forbearance agreements are up a staggering 655 percent.
• Short sales completed by Freddie are up 180 percent from the first half of 2009.
• Freddie did actually make money on REO in the second quarter, netting $40 million in profits, as compared to losses of $159 million in the first quarter.

There are a lot of other interesting facts in the article, which is worth reading in the entirety.  The takeaway is this: REO inventory is stacking up at Fannie and Freddie, and likely is mounting at other lenders as well.  This is yet another sign of the burgeoning shadow inventory, which will be ultimately make its way to the market.  This overhang of houses will cause home prices to decline.

At this point, with all this inventory still out there, we might almost be ready to put a stake in the ground that 2011 will also be the Year of the Short Sale!

Housing Wire author Cary Steinberg recently wrote an interesting piece on about HAFA and HAMP. The premise of the article is that HAFA (the Home Affordable Foreclosure Alternative) will likely be successful because it is an exit strategy for homeowners, allowing them to sell their house for less than they owe – as opposed to HAMP (the Home Affordable Modification Program), which keeps people in their houses but modifies their payment terms to make payments less of a burden.

We have written plenty of articles here on HAFA and HAMP, and identified plenty of reasons why we think it won’t succeed, but it’s always interesting to revisit what is going on in the housing market, so let’s run through Cary’s article to point out some of what we consider flaws in the argument.

The first point that is made is that homeowners simply do not want to own a home where the balance of their mortgage exceeds the value of the property. In other words, they are underwater.

Say I bought my home in 2006 for $500,000 and put $50,000 down, and I got a loan for $450,000 at 7% for 30 years. I could afford the payment, and I paid on time. Fast forward to 2009. I am not making the bonuses I was in 2006, and my wife’s hours have been cut so our family income is not what it was. It seems that the HAMP program was made for me. Now comes the real question. Do I want to stay in the house? I owe essentially $450,000 on my home. From 2006 through 2009 the value of my home decreased from $500,000 to $240,000. I now owe $450,000 on an asset that is worth $240,000. Even if I were offered a mod to 3% and the term extended to 40 years do I really want continue to pay on a loan when the asset is worth about half of what I owe?

Granted that there are folks that didn’t buy their home as an investment but rather as a homestead. A place they felt they would stay for years to come. Maybe the schools are the best or the home is close to other family members, there are a variety of reasons. Those are the folks who have kept up their modifications through the trial period and into the permanent status. They may continue to pay, but as many areas are still seeing price stagnation and even continued decline, it will be interesting to note what the recidivism rate is on the permanent modifications in a couple of years. Some people started a trial modification because they initially hoped that things would get better and they would stay in the home. Some got on a trial modification simply to buy time. Some people stopped making their payments and it was months before they were offered a solution if they qualified for one.

My first concern he did address: some people buy homes and intend to live in them for a long time. There are plenty of homeowners who are underwater on their home who can afford and do continue to pay their mortgages. As a matter of fact, as of late last year that number was almost 1 in 4 homeowners. The argument that they should walk away has been made by others and is one I strongly disagree with in principle. The oft repeated argument we make here is that short sales when appropriate are a best case solution, but they aren’t always appropriate. Short sales are a lender’s decision to minimize an imminent loss.

Now, in the event of true hardship (which the article points out by reduction in salary), short sales can be a great solution. Maybe there is no reasonable mortgage modification that can be made that would enable a homeowner to still meet their obligations. In that event, a short sale is a great solution – however we have already identified numerous issues with the HAFA program itself that make it seem underwhelming at best. The negative feedback has been consistent. There are also numerous other reasons why the HAFA program was destined to fail, including:

1. The underwhelming results of the overarching HAMP program. As a matter of fact, through January 2010, HAMP had only created a little over 100,000 modifications, despite having promises of reaching 4 million plus struggling homeowners. Remember, the HAMP program was also “mandatory“, but the results still were meager at best.
2. Promises of speeding up the process seems a little bit “pie in the sky”. Even though the 10 day window does not describe the entire process, the loss mitigation departments at the banks are still struggling with being understaffed and overworked.
3. There is no enforcement for not following the guidelines. There are no repercussions (other than consumer complaints) if things take 20, or 30 days, or if the terms aren’t followed as outlined.
4. Financial incentives are low – $1000 incentive payouts aren’t really that much in the scheme of the amount of work involved to process one of these deals. 2nd lienholders in particular can get $3,000, but that’s only marginally more than they are getting today. Since lenders aren’t able to utilize deficiency judgments under HAFA, they also lose the ability to try and collect some of those outstanding amounts. This is important, because lenders often sell these for reduced values to other debt collection firms. Those are tangible assets for a bank that are essentially wiped out.
5. Paperwork standardization – Banks are all using their own short sale packages today. Mix in some of these government HAFA files into the same loop and it’s going to get them even more confuse than they already are.
6. Removing the case-by-case analysis that short sales need: Every short sale transaction is different, and lender should approach them as such. HAFA requires lenders to identify their minimum net proceeds ahead of time, and the guideline requires 120 day period to change that value. This means that if a property falls outside of the minimum net proceeds, it isn’t eligible under HAFA. That’s a shame; because the house is worth what the house is worth, and even in the span of 120 days the criteria used can change. It removes flexibility from the process, which is critical when handling these transactions.

Everything we have seen from users of Short Sale Artisan and in the market in general has indicated that HAFA is taking up a very small percentage of short sales that are going through, and the vast majority are still being handled as they were before HAFA went “live”.  In the end the result will likely be an under performing program just like HAMP and HARP are.

The article continues to discuss the difficulty with the junior lien holder, which we have also discussed here.

Now, there are issues. Although HAFA provides for a little money to go to a junior lien if one exists, insiders are reporting that the juniors are not just rolling over and accepting what the plan calls for. This can delay a deal at best and kill a deal at worst. It is too early to tell what the success rate of the HAFA program will be but I am betting it will be far better than HAMP.

I personally would bet much different – I would say I think it will mirror HAMP in success, which is to say, negligible.

What do you think? Do you agree with the statement that:

HAMP is a band-aid. HAFA is an exit strategy.

We’d love to hear your comments!

Came across this article in the Herald-Tribune on short sales yesterday afternoon discussing short sales in Florida as being preferred to bank seizures. If you have been an active reader of The Art of Short Sales, there is nothing really groundbreaking in that statement! Regardless, it continue to shows how short sales play an important role in housing today as housing recovery appears to stagnate.

A California company that tracks distressed properties has come out with new foreclosure statistics that show that the number of properties in Southwest Florida sold through short sales is rising, while the number of properties that go all the way through the foreclosure process — and are ultimately sold by banks — is falling.

That means banks are getting better at selling properties before they take possession, and buyers are becoming more comfortable with waiting for the short sale process to close, experts say.

RealtyTrac Inc.’s first quarter statistics also show, for the first time, the specific average price points at which distressed properties are changing hands.

Properties seized by banks in Southwest Florida, for example, were selling at 30 to 50 percent discounts to properties sold by buyers who are not in financial distress.

In turn, properties sold through short sales — in which sellers have defaulted on their loans but have not abandoned their properties — are selling at a 13 to 27 percent discount.

The price differentials have everything to do with the condition of the property, foreclosure experts say.

“Properties that go short sale tend to be in better condition,” said Drew Peterson, a foreclosure specialist with Re/Max Alliance Group in Sarasota. “They tend to be owner-occupied or tenant-occupied, while bank-owned properties have been abandoned, often because the former owners had problems they couldn’t afford to fix.”

The numbers should be of interest to anyone looking to buy a house. But for flippers, who buy houses, fix them up and resell them at a profit, the numbers could provide a basic playbook, enabling them to determine how much to pay for a property and how much to sink into it before reselling.

In Sarasota County, for example, RealtyTrac statistics show that the average sales price for a home was $206,267 during the first three months of 2010. By comparison, a property seized in foreclosure by a bank sold at a 48.4 percent discount, or $106,409, while a short sale property sold at a 27.5 percent discount, or $149,630.

Again some solid evidence that in Florida short sales should be a preferred option for banks when homeowners are facing difficulty. Florida in particular has been one of the hardest hit states, so it’s no surprise that short sales are such a preferable option.

Market domination

For the past two years, foreclosures and short sales have played an out-sized role in the Southwest Florida real estate market.

Since October 2008, distressed sales have represented anywhere from 26 to 44 percent of total sales, according to data provided by Adam Robinson, a real estate agent who runs SarasotaForeclosures.com.

In May, there were 920 sales in Sarasota County, and 336, or 36.5 percent, were foreclosure sales, according to Robinson’s data.

They also show the number of short sales in the mix has been growing, while the number of bank-owned sales has dropped. In October 2008, short sales only represented 2.9 percent of the total. But last month, they represented 19.7 percent.

During the same period, bank-owned sales have shrunk from 29.6 percent to 16.8 percent of total sales.

“It took a while for banks, Realtors and the general public to get comfortable with short sales,” Robinson said. “It was a new concept. But banks have definitely gotten better at it.”

The phenomenon is still evolving, said Margaret Amador, an agent with Allison James Estates in Sarasota.

“Banks are trying to make short sales into more of a template and they are learning all the time,” she said.

More good news.  We happen to think that banks, lenders, and real estate professionals have all been adapting quite well to the “new methods” of short sale transactions, which are simply a reality in today’s world.

Going forward, market watchers believe that an increasing number of foreclosures will be handled through short sales, saving banks money and speeding the return for market equilibrium.

“Banks have learned they lose more money through foreclosures than short sales,” said Jack McCabe, a Deerfield Beach-based real estate consultant. “With a foreclosure, they have to pay taxes, maintenance and upkeep, and they have keep the air on so the homes don’t get moldy. That can add up to a couple hundred dollars a month, and if a bank has thousands of foreclosures, it can turn out to be a pretty big drain.”

Until banks start lending more freely, experts say the distressed market will continue to be dominated by investors — people like Sarasota real estate agent Tiffni Wegmann, who has sold 16 foreclosed houses and condominiums in Sarasota and Manatee counties for $603,700 more than she paid since August 2009.

Wegmann’s average mark-up on those properties was 74 percent, much higher than the price differential between the average distressed sale and the average non-distressed sale.

In Charlotte County, RealtyTrac data show that bank-owned properties are selling at a 37 percent discount to non-distressed properties, while short sales are trading at a 13 percent discount.

In Manatee County, bank-owned properties are selling for 31 percent less and short sales for 16 percent less.

More often than not, it is flippers who buy the properties and resell them for much more.

“We’re seeing a lot of flipping now — people who are buying distressed properties and reselling it quickly,” said Irv DeGraw, a banking professor at St. Petersburg College. “These people are helping to stabilize the market by driving depressed prices back up.

“I don’t want to use the Gordon Gekko quote from ‘Wall Street,’ but there is a point where greed is good.”

All in all, a positive article that short sales are still evolving from a niche market tactic to becoming a standard way of handling distressed properties that are underwater.

What are your thoughts? Post ‘em  in the comments!

The other day I was on Twitter and just generally asking people what they though of the impending HAFA (Home Affordable Foreclosure Alternatives) program, which is coming down the pike from the Obama administration on April 5th, less than two weeks from today. A lady named Sarah Stelmok, who also happens to run a fantastic blog on short sales, had posted up a reply that summed up quite eloquently what I’ve been hearing from many real estate agents, investors, and others “in the know”.

“I think it’s a bunch of crap and is a complete waste.”

Let’s break down why this sentiment seems to exist all over the Internet.

What is HAFA?

First off, for those of you who have been living under a rock, the HAFA program is an extension (technically, Supplemental Directive 09-09) of the Home Affordable Modification Program (HAMP), which itself is a part of the Making Home Affordable (MHA) program, which covers both home loan modifications under HAMP and direct refinance under HARP.

HAFA is basically an attempt to streamline the short sale process  using Deed in lieu (of foreclosure).

To be eligible for HAFA, you must meet certain criteria. We have gone over some of the bullet points of the HAFA program when it was first announced, so we won’t state it again, but in a nutshell the idea is to provide incentives to the involved parties in a short sale (the lender, the realtor, the 2nd lienholder (if there is one – and usually there is) to help motivate them to process through the transaction.

There is a lot of confusion out there on whether HAFA is mandatory for the lender.  From what we have been able to uncover, HAFA is only mandatory in very limited circumstances. The list of participating servicers is available at the Making Home Affordable Servicers List. The exact language from Directive 09-09 clearly states:

“As a result, servicers already participating in HAMP must follow the guidance set forth in this Supplemental Directive, which provides servicers with the option to determine the extent to which short sales or deeds-in-lieu will be offered under this program.”

It still seems to be up to interpretation, but for the most part what we are gathering is that this Directive is simply an amendment to the existing HAMP program, which in itself is not mandatory.

So, what is HAFA supposed to accomplish?

HAFA is designed to “clear the books” on lenders of their underperforming loans. While HAMP attempted to keep homeowners in their homes by modifying their mortgages; HAFA actually gets them out of their homes entirely, and attempts to standardize the short sale process for all lenders.

The program is pretty ambitious. As anyone who works in short sales knows, the timelines and paperwork can be onerous and difficult. The Directive 09-09 pages 16-43 are all forms and documents related to standardizing the process.

In a few bullets, HAFA is supposed to speed along the housing recovery in the United States by:

1. Standardize the short sale process across lenders
2. Speed up the short sale process significantly
3. Fully release homeowners of any deficiency judgments

There is a lot of confusion out there from what this all means. For example; the HAFA guidelines state that short sale approvals will take a maximum of 10 days. That doesn’t mean, however, that the short sale process is going to go from it’s typical 60-90 days down to 10 days. It only means that when all the ducks are in a row (or line, however you say it) – the BPO is ordered, all the paperwork is complete and in – then the clock starts ticking.

Will it work?

Well, no one really knows. Many are skeptical, for a number of reasons:

1. The underwhelming results of the overarching HAMP program. As a matter of fact, through January 2010, HAMP had only created a little over 100,000 modifications, despite having promises of reaching 4 million plus struggling homeowners. Remember, the HAMP program was also “mandatory“, but the results still were meager at best.
2. Promises of speeding up the process seems a little bit “pie in the sky”. Even though the 10 day window does not describe the entire process, the loss mitigation departments at the banks are still struggling with being understaffed and overworked.
3. There is no enforcement for not following the guidelines. There are no repercussions (other than consumer complaints) if things take 20, or 30 days, or if the terms aren’t followed as outlined.
4. Financial incentives are low – $1000 incentive payouts aren’t really that much in the scheme of the amount of work involved to process one of these deals. 2nd lienholders in particular can get $3,000, but that’s only marginally more than they are getting today. Since lenders aren’t able to utilize deficiency judgments under HAFA, they also lose the ability to try and collect some of those outstanding amounts. This is important, because lenders often sell these for reduced values to other debt collection firms. Those are tangible assets for a bank that are essentially wiped out.
5. Paperwork standardization – Banks are all using their own short sale packages today. Mix in some of these government HAFA files into the same loop and it’s going to get them even more confuse than they already are.
6. Removing the case-by-case analysis that short sales need: Every short sale transaction is different, and lender should approach them as such. HAFA requires lenders to identify their minimum net proceeds ahead of time, and the guideline requires 120 day period to change that value. This means that if a property falls outside of the minimum net proceeds, it isn’t eligible under HAFA. That’s a shame; because the house is worth what the house is worth, and even in the span of 120 days the criteria used can change. It removes flexibility from the process, which is critical when handling these transactions.

Still, many remain excited about the program. We, however, tend to think the impact it will have will be marginal at best.

For investors, the good news is that they can still process their transactions the same way they did before for non-HAFA transactions. HAFA transactions have clauses in them that are a little bit contradictory. For example, when it comes to title seasoning and property reconveyance, the short sale agreement (SSA) must state:

Notice that the sale must represent an arm’s length transaction and that the purchaser may
not sell the property within 90 calendar days of closing, including certification language
regarding the arm’s length transaction that must be included in the sales contract.

However, Page A1-1 states:

4) there are no agreements or offers relating to the sale or subsequent sale of the property that have not been
disclosed to the Servicer.

indicating that (once again!) disclosure is critical in the transaction and that a subsequent sale may be allowable. It is going to be a bit of “play it by ear” and case by case analysis as this program rolls out. All we can recommend here is that you contact your lawyers to make sure you cover yourself and always disclose, disclose, disclose!

So, what do you think? What will the impact of the HAFA program be? Is it truly a “Piece of Crap”?  Post in the comments below!

Interested in reading the HUD’s nitty-gritty analysis of the foreclosure crisis? It’s definitely a detailed read, but very informative. In a nutshell (from the Executive Summary of the report); the analysis and report covers:

This study of the root causes of the current extremely high levels of defaults and foreclosures among residential mortgages represents the final report to Congress by the Secretary of the Department of Housing and Urban Development (HUD) pursuant to Section 1517 of the Housing and Economic Recovery Act (HERA) of 2008 (P.L. 110-289). The problems in the mortgage market are routinely referred to as a “foreclosure crisis” because the level of defaults and foreclosures greatly exceed previous peak levels in the post-war era and, as a result, have drawn comparisons to the levels of distress experienced in the Great Depression. This report contains a review of the academic literature and industry press on the root causes of the current foreclosure crisis, data and analysis of trends in the market, and policy responses and recommended actions to mitigate the current crisis and help prevent similar crises from occurring in the future.

The most interesting things about this report aren’t so much what is in the rear view mirror (i.e. how it happenedl; a big part of the report) but the recommendations the Secretary makes for mitigating the crisis. (HINT: some of them involves short sales and HAFA, surprise!). Many of the recommendations involve loan modification and trying to keep people in their homes, but most of those programs have met with failure, such as HOPE for Homeowners:

In July 2008, Congress authorized FHA, under the Housing and Economic Recovery Act of 2008, to insure up to $300 billion in loans via a new program: HOPE for Homeowners. Although some lenders have expressed interest in the program, as of July 2009 the program had insured only one loan

$300 billion insurance plan for one loan? There’s a success story! The report goes on to mention that loan repayment options typically don’t work, (i.e. adding on additional payments or creating subsequent loans for delinquent balances) because those additional loans typically represent added debt burden to the homeowner that simply adds more debt to an already unsustainable situation. Loan workouts, on the other hand, have had some success; however even the majority of those are only a temporary stop-gap; the borrowers often re-default on the modified loans.

Even as the number of modifications increases, larger numbers of recently modified loans are now redefaulting. In large part, this performance reflects the fact that most loan modifications to date do not reduce monthly payments. White (2008) found that voluntary loan modifications of subprime borrowers completed through August 2008 typically increased a borrower’s principal debt and virtually none involved a reduction in principal owed.

Based on the tremendous success of those programs (tongue-in-cheek), the government then released additional plans (Making Home Affordable and Home Affordable Modification Program (HAMP)) to make loan modifications that actually do reduce monthly payments and keep struggling homeowners current on their loans. Despite government incentives, many lenders have still been wary to actually adjust downward interest rates:

To date, many servicers have been reluctant to offer interest rate and principal write-downs even when such modifications could avoid lengthy and costly foreclosure costs. In part this reflects concerns that existing pooling and servicing agreements (PSAs, or the legal agreements that govern the servicer’s authority to engage in loan modifications on behalf of the collection of investors with interests in any single mortgage-backed security pool) may limit ability of servicers to engage in loan modification activities.

Regardless, even many who do receive actual relief on their monthly payments, it still is not enough to overcome the debt burden they are facing, especially when many of the borrowers have lost jobs as well. Does it really matter if your payment goes from $2000 a month to $1700 per month if you just lost your job that was production $4,000 per month in income?

The report then continues on to discuss additional potential ways to mitigate the crisis. Some of these include educating borrowers that they shouldn’t borrow more than they can afford. (Apparently, this is something you need to teach people!)

To begin with, there is a clear need to enhance the ability of consumers to make appropriate choices in the mortgage market. Recent research on consumer behavior provides growing evidence that many consumers took out mortgages that they did not understand or that were not suitable for their needs. In particular, there is ample evidence that consumers are often overwhelmed by aggressive mortgage sales and marketing efforts that exploit various consumer decision making weaknesses.

The government is even going so far as to consider “trusted advisory” program where there would be individuals who would provide service to borrowers to educate them on the loans they are taking out, as a “mitigator” to the “overwhelming predatory marketing” of the banks.

In the face of this marketing onslaught, many community groups and counseling organizations are expanding their capacity to act as a “buyer’s broker” to help clients search for the best mortgages while earning a small fee for offering this service like any other mortgage broker. Building on this concept, there have been calls for the government to help establish a national network of “trusted advisors,” independent of mortgage providers who are available on demand to review loan documents, educate borrowers, and advise them of the suitability of their loan to their circumstances.

The report continues to suggest that banning specific mortgage types will not be sufficient since the mortgage industry can create new products quicker than they can be banned. A big point is the suggestion of banning Yield Spread Premiums (YSP) which is effectively a broker’s bonus for writing a mortgage at a higher rate (i.e. ban any payment tied into loan terms). This would be handled via Truth in Lending Act revisions.

They recommend limiting or banning yield spread premiums, which provide brokers and loan officers with incentives to sell borrowers higher priced loans, and prepayment penalties, which lock borrowers into high-priced loans and expose them to high fees if they need to refinance or sell their homes. A proposed revision to Regulation Z, the regulation which implements the Truth In Lending Act, would ban yield spread premiums and lender loan officer compensation related to loan terms. There are also proposals to develop new standards for truth in lending so that mortgage brokers and lenders do not have incentives to get around disclosure rules. Under this approach, federal regulators would evaluate whether a creditor’s disclosure was objectively unreasonable, in that the disclosure would fail to communicate effectively the key terms and risks of the mortgage to the typical borrower.

I think disclosure is critically important, so Truth in Lending is great. The ambiguity and recourse of this isn’t clear, though – what happens after a loan is written? 5 years down the road? Does a borrower have recourse to go after the lender if they feel disclosure wasn’t sufficient? Other commentators have noted as well that banning the Yield Spread Premium would reduce competition and encourage monopolies with the banks. Yield spread premium is thought to automatically be mitigated by competition. The suggestion by many is rather than banning it, disclose it instead to the end borrower. Currently, this does not need to be disclosed.

The report continues on to say  that creative solutions can help both homeowners and investors,since pre-foreclosure resolutions can be more profitable than by letting a loan go into foreclosure.

Finally, the recent mortgage crisis has exposed a range of shortcomings with the approaches that have been used in the past by many mortgage servicers, including the tendency to push less costly (to the servicer) repayment plans and short-term modifications rather than aggressively pursue options that may benefit both borrowers (by helping them stay in their homes with an affordable monthly payment) and investors (by finding resolutions that have a higher expected return than a foreclosure)..[]…..Some have also called for imposing a duty to engage in loss mitigation efforts before initiating foreclosure actions.

So, an interesting article overall. The above snippets only cover the executive summary, the full report goes into much more detail on each of these topics and much more, so if you are feeling brave and have an afternoon to burn, go ahead and open it up! There are some good charges and analysis going backwards as well that discuss the root of the problem, which I largely skipped in this commentary.

What are your thoughts? Is the result of this too much government intervention? To little? Just right? What other mitigating actions is the HUD not thinking of?