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!

Over the weekend, Freddie Mac published an informational article discussing what it has called, “Short Payoff Fraud”.

This article tipped off quite a bit of anxiety among investors and agents. Many are suggesting that this new classification of “Fraud” effectively eliminates the A to B – B to C transactions which investors often use to “flip” short sale properties.

Well, I read the article, and I think everyone is making a big deal out of nothing. Here at Short Sale Artisan we always, always, always suggest that as an investor you should disclose every detail of your short sale transactions to the lender, or risk legal trouble. We aren’t lawyers, but you can never hurt yourself (legally) by providing too much information. We talked about it in this article on the root cause of the foreclosure crisis, in this article on about deficiency judgments, when we discussed 2nd lienholder fraud, and even how important disclosure is when assembling your short sale package.

Let’s read the direct quote from Freddie Mac:

What is short payoff fraud?

According to a member of Freddie Mac’s Fraud Investigation Unit, a slight variation of our general definition of mortgage fraud also defines short payoff fraud – “Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known.” Misrepresentations in these schemes may include the buyer of the short payoff property, a subsequent transaction at a higher price, and/or the selling borrower’s hardship reason used to qualify for the short payoff. In many instances, the short payoff fraud will involve a “facilitator,” engaged by either the listing agent or the selling borrower, to assist with negotiating the transaction.

I think it’s pretty clear what they are saying. Hiding information or deliberately omitting information to the lender that may impact the lender’s decision is fraudulent. I’m not sure what the big surprise is here. This has always been the case – recent short sale fraud cases in Connecticut prove it.

More detail:

There are many variations of short payoff fraud. The example below is just one way this type of mortgage fraud can occur.

• A seller (delinquent borrower) owes $100,000 on a property that is worth $80,000.
• The short payoff facilitator negotiates with the bank to accept a $70,000 offer to purchase the property. In several instances, Freddie Mac has seen that this offer will be made directly by the facilitator or through an entity under his/her control.
• The lender/investor accepts the offer for $70,000.
• The facilitator neglects to disclose to the lender/investor that there is an outstanding offer between the facilitator and a second end-buyer for $95,000.
• Both transactions close on the same day with the net difference being pocketed by the facilitator and increasing the lender/investor’s net losses.

At first glance, this may look like a legitimate short payoff. However, in this example, the fraud is the failure to disclose the second, higher offer. The facilitator is willfully withholding important information the same way a scam artist would, and the lender does not realize they are walking into a premeditated short payoff fraud scheme. Because the facilitator is deliberately withholding the higher offer, Freddie Mac also experiences a larger than necessary loss on this sale.

Solution: Disclose your B-C transaction. Here’s the thing, and this is what investors need to be good at doing: making the case to the bank to accept your offer. Perhaps you were able to negotiate higher than market value. In the above case, if you as an investor can find someone to pay $95k on a property that is worth $80k, good luck!

Most banks already require you to disclose anyway in a short sale transaction. Again, we aren’t a legal blog, so please contact a lawyer if you want legal advise, but you should be disclosing as much as possible in your transactions.

An alternative solution is also to keep the property to fulfill seasoning requirements, then sell it. This can be done with hard money loans, but make sure you include carrying costs when calculating what profits you might be able to expect at the conclusion of a deal.

More from the Freddie Mac article discussing what they consider to be “red flags”:

Short Payoff Fraud Prevention Red Flags

Remain alert to the following flags, which may suggest short payoff fraud:

• Sudden borrower default, with no prior delinquency history, and the borrower cannot adequately explain the sudden default.
• The borrower is current on all other obligations.
• The borrower’s financial information indicates conflicting spending, saving, and credit patterns that do not fit a delinquency profile.
• The buyer of the property is an entity.
• The purchase contract has an option clause to resell the property.

The first three red flags are more indicative to me of someone looking to “strategic default”, not short sell the property. Lenders should be doing their due diligence anyway when someone requests a short sale to validate the hardship scenario is legit.

Similarly with the remaining two bullets: a buyer may very well be an entity and option contracts still exist. There is nothing illegal about using one. Lenders should again be doing their due diligence on these documents when in the short sale offer period. Assuming the information on those forms is truthful, the investor has nothing to worry about here.

Finally, these are Freddie Mac’s suggested prevention / mitigation tactics:

Short Payoff Fraud Prevention

The following protective measures are recommended in order to detect and mitigate the severity of short payoff fraud:

• Review all short payoff documentation carefully, including the sale contract. This helps determine if there is an option clause to resell the property at a higher price without notifying the lender.
• Draft a short payoff arm’s-length affidavit/disclosure notice for all parties involved in the short payoff to help avoid any hidden contracts, or side agreements. The parties involved should be, but are not limited to: the buyer, seller, listing agent, selling agent, short payoff negotiator(s)/facilitator(s), and closing agent.
• Solicit information from your borrower.
• Inquire if the borrower is aware of any other parties involved with the short payoff other than real estate professionals.
• Is there a short payoff negotiator/facilitator involved?
• Is the borrower aware of any other purchase contracts on the property?
• Require an executed and signed IRS Form 4506-T, Request for Transcript of Tax Return,from each borrower and process the form to determine if the borrower’s qualifying income is accurate.
• Order an interior Broker Price Opinion (BPO) and review all other BPOs that have been ordered on the property (drive-bys and full interiors) to establish a high/low value variance. The BPOs should include a past and present Multiple Listing Service (MLS) listing history, as this will determine if the property was relisted in MLS while the short payoff is being processed.
• Review the Freddie Mac Exclusionary List to see if the parties to the short payoff are on the list. Seller/Servicers can access the Exclusionary List via the selling system, MIDANET®, MultiSuite®, and Loan Prospector®.
• Immediately notify Freddie Mac if you are aware of a second purchase contract for a higher price

Again, do you see anything here that all lenders (not just GSE’s like Fannie Mae and Freddie Mac) aren’t already doing? Seriously – a suggested step for the lenders to take is to “review all documentation, including the sales contract”?

Post your thoughts in the comments! Do you think this will impact your investing business? What are your thoughts on short sale disclosure?

National Mortgage News Online reports:

Fannie Mae has decided that certain distressed borrowers who agree to give up their homes as an alternative to foreclosure should get a second chance at homeownership sooner.

The policy change, announced Wednesday, is meant to reward borrowers for cooperating with their loan servicers and to support the housing market.

The government-sponsored enterprise told lenders that for borrowers who grant a deed-in-lieu of foreclosure, it will shorten the minimum waiting period to be eligible for a new Fannie mortgage. Currently such consumers must wait at least four years. Beginning with applications submitted July 1, the period will drop to two years, provided the borrower puts at least 20% down on the new home.

Credit experts called the change an acknowledgement that borrowers who work with their lenders are better risks than those who simply mail in the keys.

This initially seems to me to be an attempt to mitigate “strategic defaults”, i.e. just walking away from the property, rather than working with the lender through the hardship. While in theory, this makes sense; the problem is that many of those who are strategically defaulting are doing so because they wouldn’t be considered by the bank to be a good candidate for a short sale. Often times strategic defaulting is just “walking away” even when the ability to pay the mortgage still exists. In that case, the homeowner who is determined to walk away will still do just that, because approaching the bank to negotiate without existing or imminent hardship is almost always a dead-end road.

“It makes sense to be a little bit kinder to borrowers who have made an effort to do something about the loan and did not just walk away and say it was the lender’s fault,” said John Ulzheimer, the president of consumer education at Credit.com Inc., a lead generator. “Someone who fights to complete a short sale is likely to be a continuing strong credit risk going forward if they are not saddled by a disadvantaged mortgage.”

Still, the change is not a giveaway. Fannie also set stricter parameters for borrowers who have tried to rehabilitate themselves. If they can make only a 10% down payment on the new home, the wait period remains four years after granting the deed-in-lieu.

20% down payment is still pretty significant, and 2 years isn’t a lot of time to gather funds to that amount. So, my expectation is that participation in this will be “light”.

Still, I do wonder about the correlation between paying loans back on time and making an effort to work out a situation with the lender. It seems a bit “touchy-feely” to me.

None the less, for investors and realtors working out there, this is something you can pitch to homeowners right now who are distressed with a Fannie loan.

Fannie officials would not discuss the changes beyond the lender bulletin, which said the GSE’s goal was “to support overall market stability and reinforce the importance of borrowers working with their servicers when they have difficulty repaying their debt.”

The announcement comes on the heels of the Obama administration’s Home Affordable Foreclosure Alternatives program, which began April 5. It aims to streamline the complicated processes of short sales and deeds-in-lieu. The program is aimed at homeowners who do not qualify for a loan modification and industry experts expect a dramatic increase in such “preforeclosure actions” this year and next.

In a short sale, the home is sold for less than is owed on the mortgage and the lender accepts a discounted payoff.

Mortgage lenders have expressed concern that a dearth of homebuyers will cripple a housing recovery. At least 6 million homeowners have gone through a foreclosure in the past three years and another 3 million are expected to this year, according to RealtyTrac Inc., an Irvine, Calif., data tracker.

Such borrowers are essentially shut out of the housing market because, with a foreclosure in the last five years showing up on their credit report, they are not eligible for loans that can be sold to Fannie and Freddie Mac.

“People in trouble don’t really understand the credit system,” said Rayman Mathoda, the president and chief executive of AssetPlan USA, a Long Beach, Calif., firm that arranges short sales. “From a credit standpoint, a short sale, a deed-in-lieu and a foreclosure are all the same thing.”

Mathoda has teamed up with other mortgage executives to lobby the Treasury Department and the GSEs to adopt a plan, called Second Chance, that would give a wide range of borrowers who have lost their homes the chance to be rehabilitated after two years if they undergo credit counseling. “A short sale is a proactive resolution to a credit problem, while a foreclosure is reactive,” she said.

An interesting move by Fannie. I find the last comment by Rayman Mathoda a bit subjective: from a credit standpoint, a short sale, deed in lieu, and foreclosure are certainly not the same thing.

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

HAFA is upon us, effective April 5th, 2010. Here are some of the posts we have featured on the Art of Short Sales over the past few months discussing HAFA and it’s impact.

This article talks about the negative feedback many are giving on the HAFA program and how it will impact them.

A short video from CNBC describing HAFA along with some so-called “Expert Testimony”

Analysis on the impact the HAFA program is expected to have

Chart showing the potential opportunity for HAFA eligible properties

Article and commentary analyzing the HAFA program

Documents from the National Association of Realtors designed to give realtors and real estate agents the “411″ on the HAFA program

Straight forward link to the actual text of the HAFA program

Additional analysis on the treasury plan including bullet points on the all the important questions you might have

Our original article in November breaking the news of the HAFA program when it was first announced

Boy, it sure seems like every day there is a new plan out there to help the housing market!

The Wall Street Journal reported yesterday on a new plan by the Obama Administration to cut mortgage balances without actually getting the borrowers out of the home.

Before we go into analysis, here are the documents about the program:

1. F.A.Q.
2. Policy Overview from HUD
3. Samples of how program will work
4. Fact Sheet

The new program is being billed as an enhancement to the HAMP program, which we have talked about extensively on this blog. It is being funded (the tune of $50 billion) by the TARP (Troubled Asset Relief Program).

The program is designed has four goals, but two of them are simply tweaks. The two that represent entirely new areas are:

First, is  temporary assistance for unemployed homeowners. Eligible homeowners will be able to get their payments reduced, and possibly even eliminated, for a period of 3-6 months.

This program doesn’t have a set kickoff date but the memo states it should be fully in place by the fall. Eligibility is the same as HAMP. Additionally, you must apply within 90 days of delinquency on a loan and have proof that you are receiving unemployment benefits.

Secondly, principle write-downs for underwater homeowners. This is a modification to the current HAMP (Home Affordable Modification Program), the loan modification arm of the MHA (Making Home Affordable) program, which was designed to help individuals refinance or restructure their mortgage, and helping lower their monthly payments by reducing the interest on the loan, increasing the loan length, or a number of other creative methods not involving loan balance reductions.

The new modifications to the HAMP program now put principle reductions on the plate as well. It’s almost like an in-place “short sale” without actually selling the property. The WSJ calls it a “short-refinance”.

Friday’s announcement, of course, will get lots of attention because it is also expanding HAMP to include loan balance reductions to the toolkit that banks have to use to lower mortgage balances.

What does it all mean? Well, the WSJ sums it up quite well in that the administration really is getting flak from all sides and has to tread carefully:

The administration, under pressure from community activists, lawmakers and some mortgage investors, is trying to walk a fine line with these changes. Officials want to respond to criticism that HAMP hasn’t done enough to prevent foreclosures. But they also are heeding warnings from big banks that a full-fledged embrace of the idea of reducing principal might prompt many borrowers who can still afford their mortgage payments to default in the hope of being rewarded with a smaller loan.

In other words, the principle reduction plan will encourage homeowners to default on their loans so they can qualify for what is essentially a free write-off of principle as apart of a loan modification.

What’s next down the pike for federal programs? Apparently a plan as well to deal with second mortgages:

The administration also has struggled to launch a program designed to encourage banks to modify second-lien mortgages. The administration is expected to increase incentive payments under that program.

For investors, we think this is similar to our analysis of the HAFA program, in that it will have a marginal impact. Again, “marginal” when spread across the nation can still be significant; so it’s one to watch closely. But the HAMP requirements ahead of time will limit the volume to which this applies. While some homeowners may be motivated to “walk away” from their mortgages to help usher in a principle reduction under these new modifications, we think that will be the exception rather than the rule, since credit is still damaged and their is no guarantee the modification will be successful.

Bullet points of the plan:

Improvements to the Home Affordable Modification Program – More Help for Homeowners

1. Temporary assistance for unemployed homeowners while they search for re-employment

• Mortgage payments reduced to affordable level for a minimum of three months, and up to 6 months for some borrowers, while eligible homeowner looks for new job

2. Requirement to consider alternative principal write-down approach and increased principal write-down
incentives

• All servicers required to consider alternative modification approach that emphasizes principal write-down with incentives based on the dollar value of the principal reduced
• The principal reduction and the incentives will be earned by the borrower and investor based on a pay-for-success structure

3. Improvements to reach more borrowers with HAMP modifications

• Improvements to borrower solicitation requirements including clear performance timeframes for both servicers and borrowers and a prohibition against initiation of a new foreclosure referral when a borrower is cooperating with the servicer to obtain a modification
• Borrowers in active bankruptcy must be considered for HAMP upon request
• Increased incentives for servicers to provide permanent HAMP modifications
• Expansion of HAMP to include homeowners with FHA loans

4. Helping homeowners move to more affordable housing

• Relocation assistance payments to homeowners receiving foreclosure alternatives doubled
• Increased incentives to servicers and lenders, including increased incentives for extinguishment of subordinate liens, to encourage more short sales and other alternatives to foreclosure

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?

A new article yesterday from the NY Times discusses the upcoming HAFA programs in some detail:

March 7, 2010

Program Will Pay Homeowners to Sell at a Loss

By DAVID STREITFELD
In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.

For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

We are less than one month away from the implementation of the new Short Sale program (HAFA, or Home Affordable Foreclosure Alternatives), and many investors and agents are wondering how this program is going to affect them. It isn’t really clear yet, some think this program is a boon while others think it will be a bust. The friendliness of the program to investors is also in question. In any case, the snip above clearly outlines the governments motivation to kickstart a housing recover, and the importance of an election year shouldn’t be underestimated.

“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser.

The problem is highlighted by a routine case in Phoenix. Chris Paul, a real estate agent, has a house he is trying to sell on behalf of its owner, who owes $150,000. Mr. Paul has an offer for $48,000, but the bank holding the mortgage says it wants at least $90,000. The frustrated owner is now contemplating foreclosure.

To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash around.

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

The relocation assistance is one of the biggest benefits for homeowners. Previously the borrowers who undergo a short sale were not allowed to receive anything; now they have the ability to at least get some money for moving expenses, which would have been difficult to garner. I’m still skeptical on how this will actually incentivize short sales though, it’s not as if relocation expenses alone were the make or break item in a lot of potential short sale transactions.

Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure.

For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.

For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.

If short sales are about to have their moment, it has been a long time coming. At the beginning of the foreclosure crisis, lenders shunned short sales. They were not equipped to deal with the labor-intensive process and were suspicious of it.

The lenders’ thinking, said the economist Thomas Lawler, went like this: “I lend someone $200,000 to buy a house. Then he says, ‘Look, I have someone willing to pay $150,000 for it; otherwise I think I’m going to default.’ Do I really believe the borrower can’t pay it back? And is $150,000 a reasonable offer for the property?”

Short sales are going to be successful with or without HAFA. Lenders have been making gains in Q4 2009 and Q1 2010 to get caught up and improve their processes for their loss mitigation departments and become more efficient with making short sale decisions. Ultimately though, this repeats what we say here in this blog time and time again: the case to the bank has to be clear and compelling. Otherwise, legal wrangles and stalls occur.

Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.

Last year, short sales started to increase, although they remain relatively uncommon. Fannie Mae said preforeclosure deals on loans in its portfolio more than tripled in 2009, to 36,968. But real estate agents say many lenders still seem to disapprove of short sales.

Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.

Mr. Paul, the Phoenix agent, was skeptical. “In a perfect world, this would work,” he said. “But because estimates of value are inherently subjective, it won’t. The banks don’t want to sell at a discount.”

I think Mr. Paul is mistaken here. I would agree that a range of value is subjective (“Is it $290,000? Is it $300,000?). When the “subjective range of values” for a home is significantly less than the mortgage amount, and the holding costs and carry costs are such that the bank would likely lose more money in a foreclosure scenario than by unloading it earlier with a short sale,  the case for a short sale is pretty clear.

That said, there are of course circumstances where the numbers are so close a bank could go either way (“We could short it for $290,000 but the auction price will be $280 or more”), but those will always exist and those are the situations where the investor / agent has hurdles to overcome in making the case for the short sale to the bank.  It becomes a situation of discussing holding costs, unreliable outcome in an auction / foreclosure scenario, and so on to really build the case.

“This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.”

Exactly as we have said here – the circumstances around the short sale have to be real and verifiable. A bank’s decision on whether or not to accept a short sale offer is not a matter of emotion, ever! It’s a business decision, period! Appealing to emotion will not work with a bank. There has to be real benefit to the bank for a short sale to be accepted (that is; the alternatives need to be worse)!

What are your thoughts on the article, and on HAFA in particular. How do you think HAFA will affect you and the short sale market in particular?

Here are some quick links from the National Association of Realtors to their documents on HAFA, including their own FAQ.

Brochure – About HAFA:

• About HAFA Color Brochure

Government Guidelines

• Government Forms and Guidelines

NAR HAFA Program FAQ

• NAR HAFA Program FAQ

I was reading this article today in the LA Times about lenders becoming increasingly accepting of the short sale process. It mirrors what we have been saying here in this blog since November – that short sales are increasingly becoming accepted and it’s being pushed by politicians and the bank’s best interests.

The reason I really like this article is because it pulls it all together. In this snip, the article discusses why banks have traditionally been reluctant to agree to a short sale:

Lenders, which can withhold approval of a short sale if they don’t like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

Of course, a foreclosure also locks in losses, unless the bank wants to hold properties for undetermined years in the hope that markets appreciate – hardly a smart move for a lender to make!

There are also some very interesting data points, and the numbers don’t lie! Looking at some historical context from 2009, the growth in short sales is just mind boggling, particularly with Fannie and Freddie:

Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation’s largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.

The article continues on to talk about the Obama administration’s incentives for Short Sales under HAMP / HAFA which kick off in just a few short weeks (April 1st). Heck, even economists are mostly agreeing on the value short sales bring to the banks, the real estate market, and the economy:

Many economists view short sales as a way to address a problem that mortgage relief hasn’t fixed: properties that are “under water,” carrying more debt than the home is worth.

“Making short sales easier would go a long way to freeing up the market,” said Richard Green, director of the Lusk Center for Real Estate. “Right now, if people are under water on their house, they are really stuck.”

And, none the less, the process remains difficult for investors and agents because of understaffed loss mitigation departments at banks. (Although, Bank of America is supposedly doing something about it!)

“I wouldn’t call it overwhelmed,” said Matt Vernon, the executive in charge of short sales and bank-owned properties for Bank of America Home Loans. “But the volume has certainly stressed our current process.”

Here is one of my favorite quotes from the article, stating that banks can reduce their losses by an average of 10% by accepting a short sale:

One factor motivating banks to go along with short sales is that foreclosures typically cost more. Foreclosed properties often sit vacant, susceptible to damage from neglect or vandals. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale.

“The bank or the investor is going to lose money on a short sale or a foreclosure,” said J.K. Huey, senior vice president of Wells Fargo Home Mortgage. “You don’t lose as much if you sell the property when it is occupied.”

It also delves into the tricky situation caused by 2nd mortgages / lienholders:

Of the 1.2 million U.S. properties in foreclosure, about 34%, or 403,670, have a second loan, according to RealtyTrac. In California, with 280,023 properties in foreclosure, about 46%, or 128,800, have a second loan.

“Those junior liens make short sales much more difficult and they make modification much more difficult,” said Michael LaCour-Little, a finance professor at Cal State Fullerton who has studied the issue. The different banks “often have no incentive to cooperate.”

All in all, definitely one of the better articles I’ve seen summarizing all the current news about short sales. I think the article could also have mentioned some of the recent fraud with 2nd lienholders as well as the importance of investors to the short sale process as well.

What are your thoughts? We’d love to hear from you in the comments!