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 this article from CNBC last week discussing the impact HAFA has had (read: not what was expected!)

The treasure department says the following

“While HAFA has been widely credited with streamlining the short sale process by setting clear timelines, documentation requirements and procedures, feedback from various stakeholders including servicers, housing counselors, realtors and others supported that additional enhancements could be made to further streamline short sale transactions, to the benefit of homeowners.”

As a result, HAFA rule changes include the following:

A recent report from the folks who oversee the TARP (the Congressional Oversight Panel) said that the Treasury has spent just $4.3 million on HAFA for 661 short sales. So Treasury, last week, decided to change the rules a bit:

• HAFA no longer requires that servicers verify the borrowers finances
• HAFA no longer requires servicers to determine if the borrowers monthly payment is higher than a 31 percent debt-to-income ratio.
• HAFA no longer requires second-lien holders to agree to accept 6 percent of the unpaid principal balance owed them, up to $6,000. Servicers now decide who gets paid how much, with a cap still at $6000.
• HAFA now requires borrowers seeking a short sale get an answer/agreement within 30 days.

We have criticized HAFA since its inception and are not surprised at all to see it faltering. That said, the guidelines mentioned above look like they provide marginal improvements, but not enough to drastically change anything. In particular, one we wrote about in an earlier blog post:

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.

This was not adjusted and really makes it difficult for lenders to truly handle transactions on a case by case basis.

What are your thoughts on the market forecast and the HAFA program?

Top mortgage servicers have completed 91,827 short sales or deeds-in-lieu of foreclosure on canceled trial or declined modifications through the Home Affordable Modification Program as of September, up 27% from the previous month, according to data from the Treasury Department.

This is pretty fascinating news. The HAMP program continues to fail such that there has been a 27% increase in the number of attempted modifications that proceed on to deed in lieu or short sale. Although, we have been saying for close to a year that HAMP and HAFA have been incredibly poorly executed.

The Treasury started HAMP in March 2009 to provide incentives to servicers for the modification of loans on the verge of foreclosure. Through October, those servicers have started 1.4 million three-month trials and converted 519,648 of them into permanent status, though conversions have been going down in recent months.

The top eight servicers — have canceled 551,821 trials either due to a redefault, lack of documentation, or the borrower was deemed ineligible. Those same servicers have declined 842,436 homeowners from entering a trial, according to the latest Treasury data through September.

Of the canceled trials in that time, 47,001 have been liquidated through a short sale or the homeowner gave up the deed-in-lieu of foreclosure. Of the mortgages that were denied from a trial, 44,826 went into short sale or deed-in-lieu for a total of 91,827.

Most of the short sales, however, are reportedly not being done through the Home Affordable Foreclosure Alternatives program, which was launched by the Treasury in April to incentivize servicers to conduct short sales and DILs on loans that fell out of HAMP.

All that hullaballoo about HAFA saving the day and the majority of them aren’t even being processed through HAFA (which was intended to be a relief program for those who couldn’t maintain payments even on a modified loan).

Even though the Treasury pays the servicers for a transaction done through HAFA, the Special Inspector General for the Troubled Asset Relief Program reported 342 short sales and DILs completed through HAFA as of Sept. 30.

The Treasury has not released official numbers on HAFA, but has said it expects to before the end of the year.

We can hardly wait to see what those numbers look like! 342 short sales through HAFA as of Sept 30th!!

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!

Interesting read at CNBC last Friday about banks moving to short sales by Dianna Olick.

Earlier this week a top executive at Bank of America told an REO conference in Dallas that the lender would be focusing more on short sales than ever before.

At first hearing this, I assumed it was because of the government’s Home Affordable Foreclosure Alternative Program, which provides cash incentives to servicers and borrowers for short sales and also streamlines the process, but of course there’s way more to it than that.

Said Bank of America exec, Matt Vernon, whose official title is National REO, Short Sale and Deed in Lieu Executive (his childhood dream title I’m sure), granted me an interview this morning, and was pretty clear as to why B of A is pushing these alternatives.

Interestingly, we had posted an article about Bank of America when they hired Mr. Vernon, and posed the question as to whether we thought this new focus on short sales by Bank of America would relieve some of the pressure on the housing industry in general and more specifically some of the latent frustration investors and real estate agents have had with Bank of America specifically.

“We understand the reality; a large number of homeowners won’t meet the eligibility for the HAMP (the government’s Home Affordable Modification) program,” Vernon says. He also noted the sheer volume of borrowers now coming through the short sale process. He expects to see far more.

We all had our skepticism about HAMP and HAFA, and here is some more icing on the cake coming from the big dog himself about the reality that HAMP eligibility itself outs a large number of otherwise worthwhile short sale candidates.

The big difference, he says, is that BofA, as well as some other big banks, are changing the model from reactive to proactive. In other words, instead of waiting for a borrower or real estate agent to approach the bank with an offer for a short sale, they are using a “cooperative approach, with homeowner, Realtor and servicer on behalf of investor, working to move that property through the process. All three of the interested parties holding everything together,” Vernon explains.

So the servicer sets a minimum value for a short sale and then the borrower and Realtor go out and find a buyer. When they do, the process then moves far more quickly because it’s already approved.

Thankfully. It’s good to see Mr. Vernon continuing on the path he said he would when he took over the flailing Bank of America short sale department.

Which leads me to another report from Clayton Holdings, which finds short sales cut risk severity by 13 percent more than REO sales. And in some states where the foreclosure process is more lengthy, short sale loss severities can be as much as 26 percent lower than REO loss severities.

“I would say that’s generally accurate in what we see,” agrees Vernon. “It really comes down to time. The quicker you can facilitate the property moving.”

This is a great link to keep handy and use when making the case to the bank about your short sale. Again more validation that the short sales process does in fact save time, energy, and ultimately mitigates the bank’s risks significantly.

The good news is, that will cut down on foreclosures. The bad news is that short sales, like it or not, are comps. They sell for less, and consequently bring down the values of properties around them.

As we have said over and over; a short sale isn’t the best outcome, but is the ideal solution in the right scenario. A homeowner going into foreclosure is worse than a short sale!

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

HAFA has been out for only a few short weeks, and already the feedback is piling in.

Most of it? Not so positive.

I posted our article, “The HAFA Program is a Bunch of Crap” on LinkedIn group, FSSA (Foreclosure and Short Sale Agents), to see what short sale agents who are working with the HAFA program are saying about it.

Here are some of the comments so far from Help You Short Sell, Inc., they has very revealing and interesting comments about their experience to date with the program:

So we had our first 2 HAFA tragedies (I am going to repost this, I think everyone needs to read it) Come to find out, not as cut and dry as you would think. Here is what went down on the 1st one:

2 liens, we had gotten the 1st to give the 2nd lien 29k to settle their balance (roughly 10%….obviously happy 2nd, 1st was upset but wanted to move it after us riding them for the last 17 days on it) so we are doing good and happy to get this one over to closing. 1st lien calls on Wed (4/7/10) and says “Sorry this is a HAFA loan, we can only give the junior a maximum of 6k, tell them to take it”. Went to 2nd, and low and behold the response from them was less than civil. Luckily for us, we work with the upper brass at the 1st, explained the situation to the head of all liquidations for them (REO’s and SS/Pre-foreclosure) and he straightened it out. Obviously we are happy that we were able to straighten it out (so are the realtor, buyer and seller) but this shouldn’t happen.

Number 2: Got a Realtor that we work with a lot, she sent us a file, says it’s a HAFA just waiting on the SSA from the servicer, I told her why don’t you list it right now rather than waiting and she obliged. The SSA came from the bank (they will remain nameless for the moment) but come to find out, the investor who backs this loan has stated that the price for this home will be 132k with 2% total commission (really….I kid you not). We went to the head at that bank as well and are waiting their response….I honestly believe we can get them to bend, I guess their logic is, the Realtor/3rd party such as us doesn’t have to do any work (Really??? 54 pages of docs filled out plus listing agreement, financials, hardship, contract, HUD prequal on top of that? We are doing more work than ever on these stupid HAFA short sales). Anyways had to vent on it and share the experiences…if any Realtors want help with HAFA short sales, feel free to send them our way (we have several of the lenders straightened out on theirs).

Oh and just one last FYI…talked to a very high ranking person at a top 5 servicer, only .3% (that’s point 3%) of their loans qualify…told me it will be business as usual. We are doing the best we can right now with all of ours (we only have about 22 HAFA ones, the other 99% of our pipeline is “standard” short sales) and the funny thing is…our “standard” short sales are done in about 5-45 days (as we can use our connections) while the HAFA ones are being quoted as 60-90 days right now (haven’t experimented with the upper brass at the 20 largest servicers yet on this program except for the problem children).

A follow on post:

… look at our 2 HAFA tragedies above. The program is great that it creates awareness for delinquent borrowers, however it will fall far short of what the hopes are for it, just like HAMP has.

In addition, the other GSE investors (Fannie, Freddie) have the option to put their own systems in place for it. As it stands right now with Fannie Mae implementing the HAMP/HAFA program nationwide and Freddie Mac having to audit all the information, they don’t have the time nor the resources to implement their own form of it. Also, they were suppossed to do a “streamlined pre-approved” short sale program (under merely their option) in Phoenix and Orlando last year and they still haven’t done it.

Our loan that fell apart was the commission one. We have been doing this long enough to know that no agent is going to work for 2% total commission (oh yeah split that with the co-op agent as well) on a 120k house.

And one last post for now:

.. here is what we received from the heads of the banks in regards to HAFA.

Most servicers are participating in the program, just because they are doing this, doesn’t mean the investor that they are servicing the loan for is participating in the program. On top of that, the investor doesn’t have to go all in with the program (this is called their “contractual restricitions” where they can dictate that the net must meet all their guidelines (I.E. no more that 8% total closing costs (commissions, settlement, SPCC, HOA, etc).

In this case, the investor ultimately holds the trump card, not the bank. The investor gets to play by some, all or none of the rules and can say “2% total commission, NO HOA fees, no taxes, 5k contribution due to credit/lack of hardship”. Essentially, while the plan makes it sound exciting, it hasn’t really chnanged anything (I have actually seen decreases in our short sale turn times because the banks are having to implement pages upon pages of documentation).

Very interesting and enlightening information so far, but for the most part as we predicted here. Additional paperwork on top of an onerous process has made it actually slightly more difficult, in some cases. Not going “All In” on the program is also something we discussed here, since the HAFA program is guidelines only, servicers are selectively picking how to comply and “how much” to comply.

Volume? Relatively small, right now. This particular poster mentioned 1/3 of 1. That’s pretty small.

What is your anecdotal experience to date? Visit LinkedIn’s group up above or post up in the comments here and share your opinions!

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

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!

Reporting by Diana Olick from CNBC:

The video takes a high level look at HAFA and the government program. All in all a decent view but any readers of this blog won’t be surprised by any of the content.  In a nutshell, it simply discusses short sales and how it could help clear inventory from the books; but that lenders are hesitant to just “write off” bad debts.

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

A great analysis article today courtesy of Housing Wire discusses how the solution to the housing crisis will ultimately be REO (real-estate owned).  The REO trend is based on their analysis that the size of the foreclosure market is so overwhelming that even short sales won’t be able to keep up with the demand:

But in the end, the real key to resolving the problems that yet remain in housing is likely to come back to an old standby: REO property sales.

Yes, really. But to understand why, you’ve got to first really understand the scope of the mortgage default problem we’ve now got.

According to data from Lender Processing Services (LPS: 40.74 +1.29%), a whopping 7.4m loans are now non-current, compared to just 4.1m on average between January and June of 2008. A recent JP Morgan Chase (JPM: 43.00 -0.16%) investor presentation presents the problem more visually, per the data below:

JPM Prime Mortgage Defaults

The analysis here is that the loans in default are becoming more in default. While short sales will play a critical role in assisting in the correction process, the limitations within HAMP and the problem of 2nd lienholders make short sales too cumbersome to resolve all the issues in the housing market, and thus REO will play an increasingly important role.

The article states that for loans over 90 days past due, the average days delinquent stands at 272 days, which us up from around 200 days in 2008. For foreclosure loans; the delinquency average 410 days!

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.

So, that sets the stage to show the volume that we are facing. The article states that while short sales will be important; REO will also be important; for two reasons.

First, the infamous second lien: over half of all first mortgages have second liens as well, and these second lienholders have very little incentive (typically $1000) to agree to a short sale. (Unless, of course, there is fraud involved and money passes hands off-HUD!). In fact, the article continues on to suggest that the HAFA program may well encourage the pressure to commit fraud.

Government’s implicit endorsement of short sales via the HAFA program seems only more likely to increase this sort of pressure. Regulators now face a very unique conflict of interest, and it will be interesting to see how this is resolved: on one hand, violating RESPA helps grease the wheels of a short sale, something the administration wants to see happen; on the other hand, violating RESPA is a federal offense.

Our thoughts on this? Somewhat split! Savvy investors and agents have been able to negotiate successfully with second lienholders and will continue to do so. Yes, they are a huge area of difficulty; but in many cases a second lienholder will get some settlement (hey, even $1000 is better than $0), and if the case is made that the house will go into foreclosure and the 2nd lender is confident that will be the outcome, why wouldn’t they accept the $1000? That said; properties that are “on the fence” are of course more in jeapordy. That incentive isn’t any different today than it was six months ago, and short sales have continued to dramatically climb in popularity and use despite the 2nd lienholders unfortunate position.

Secondly, HAFA itself: the article then continues to discuss HAFA in some more detail:

Meet HAFA, child of HAMP. The HAFA program, going into effect on April 5, is getting plenty of attention—and the program’s heart is in the right place. But most are forgetting that it’s an extension of HAMP, the government’s loan modification program that has seen tepid success at best thus far. A loan must first be HAMP-eligible in order for anyone (borrower, servicer, or investor) to qualify for the program’s various incentive payments for short sale or deed-in-lieu.

Which means any of the guidelines applicable to the HAMP program—loan in default or default imminent, within UPB guidelines, owner-occupied, and originated prior to 2009—still apply.

The gist of the statement is that HAMP has been relatively unsuccessful, and trying to get HAFA to work in that situation will be minimal at best:

As for the 7.4m already troubled borrowers? 1.3m troubled homeowners have received offers for modifications under HAMP to date, according to the latest report card, with 1.1m agreeing to a trial – and of that, 168,000 have moved to permanent status since the program’s start in the middle of last year. (We don’t know how many have since re-defaulted, however.)

That’s certainly a small number, particularly over the course of six full months, when one considers the size of the housing crisis on hand. Similar to analysis we did on the Treasury’s report, the concern is that HAMP utilization is both low and that re-defaulting is a continuing problem on modified loans.

JPM, for example, recently reported that out of every 100 HAMP trials offered, 25 borrowers do not pay as agreed and another 29 do not submit required documents, omitting Social Security Numbers, signatures and the like on documents that are submitted.

(Makes you wonder, though, 29% of borrowers do not submit the required documents….. we are willing to bet this happens all the time and then we wonder why short sale applications sit on loss mitigators desks without movement!). And this happens at a bank that, according to the article, has 15,000 dedicated staff just for loss mitigation and each borrower receives an average of 36 calls, 15 letters, and 2 personal visits!

Additionally, HAMP’s inherent limitations limit HAFA. Of 6 million borrowers late on their loans, HAMP only applies to 1.8 million.

The article goes on to say (and this we certainly agree with) – that HAFA will not all of a sudden shift all the delinquent properties via short sale. It’s being overblown:

Instead, the short sale process in general is likely to become more streamlined as a result of the HAFA program, and that will help servicers process more short sales than they may have in the past.

Well, investors and agents would gladly take some streamlining!

So, while HAFA and government programs to aid short sales are expected to assist in a housing recovery, ultimately the author believes REO is the true end-game of recovery. While this is probably true, it certainly doesn’t diminish the opportunity short sales present, in the correct circumstance.

What are your thoughts on REO vs. Short Sales for recovery?