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

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?